How much should I save in an emergency fund?
Vanguard, the big mutual fund company, suggests setting aside $2,000, or half of one month’s expenses, whichever is greater, as a buffer to cover unexpected but common “shocks,” like a car or home repair or medical bill. Then, to protect against a possible job loss, it suggests continuing to save to build a buffer of three to six months of living expenses so you can pay your bills while looking for another job. (The average span of unemployment was just under six months, according to the latest jobs report.)
With roughly $2,000 on hand, people can generally cover unforeseen costs without resorting to credit cards, which carry double-digit interest rates, said Paulo Costa, a senior behavioral economist at Vanguard who is also a certified financial planner. “The initial $2,000 is really what makes a big difference,” he said, by helping people avoid becoming financially derailed by common, if unanticipated, expenses. “Having it when you need it provides people with a lot of peace of mind.”
Even smaller amounts can help, Dr. Costa said. “Saving something is better than saving nothing.”
Some research has shown that for lower-income families, savings of as little as $250 to $750 can significantly reduce the likelihood of serious financial woes, like missing a utility payment or being evicted.
Also, take your family’s circumstances into account, said Spencer Betts, a certified financial planner in Lexington, Mass. If you are married and both you and your spouse make good salaries, maybe saving three months of expenses is sufficient. But if you’re in a niche or low-demand industry and it may take a while to find a new job, you may want to put aside enough money to cover six months of expenses or more. He recommended setting both a number and a time frame. “The more specific the goal is,” he said, “the easier it is to save for.”
J. Michael Collins, a professor at the University of Wisconsin in Madison and a household finance specialist, said the three- to six-month guideline might be too daunting for many people. He suggested that people consider these questions: “What keeps you up at night? Making the rent or mortgage? A car payment?” Aim to set aside enough to cover a month or two of those expenses, he said.