Emergency savings — how much is enough?

Figuring out how much to set aside in a rainy day fund isn’t a one-size-fits-all proposition, though the rule of thumb of three to six months of living expenses is a reasonable guideline — and one that is widely disregarded. According to surveys, two-thirds of American households earning less than $100,000 per year do not have enough available cash to handle $10,000 in unexpected costs. Other studies note that one in four Americans has more credit card debt than emergency savings.

What’s the result? A dependence on credit to get through the rough times. And when reliance on loans and credit cards hardens into a lifestyle, disciplined saving takes a back seat. Consider these questions when deciding how much to stash in your emergency fund.

  • How stable is my job? If you’re in a relatively secure position with your company or organization, you may not need to set aside as much for emergencies as someone in a highly-volatile industry that’s prone to layoffs. Think government jobs versus tech start-ups. Of course, as the last recession made abundantly clear, the expectation of one career at one company is no longer common. So it makes sense to err on the side of caution.
  • What are my necessities? Think day-to-day costs, not salary. Plan for your emergency account to contain adequate funds to cover fixed costs such as mortgage and car loan payments. Put everyday layouts for food, transportation, child care, insurance, and utilities on the list too. If you lose your job or a medical crisis looms, costs such as dining out, new clothing purchases, and cable television subscriptions may need to be reduced or eliminated.
  • Do I have other sources of income or assets? In a true emergency, you might need to cash out a mutual fund or sell an existing asset. These non-salary sources can reduce the amount of cash you’ll need to draw from your emergency fund.