While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.
How Much Should An Emergency Fund Be? The standard rule of having 3 – 6 months' worth of living expenses in your emergency fund is recommended by many financial experts.
An emergency fund is necessary for peace of mind and smoothing out financial bumps in the road. Let's look at the average emergency fund size by age and how much we should have. According to Federal Reserve data, the average savings amount is $8,863 in America as of 2019.
An emergency fund is something that most personal finance experts recommend. In most cases, they recommend having between three and six months of expenses on hand. I've chosen to keep $35,000 on hand for emergencies — a full year of expenses.
It's all about your personal expenses
Those include things like rent or mortgage payments, utilities, healthcare expenses, and food. If your monthly essentials come to $2,500 a month, and you're comfortable with a four-month emergency fund, then you should be set with a $10,000 savings account balance.
Fast answer: A general rule of thumb is to have one times your annual income saved by age 30, three times by 40, and so on.
But some people may be taking the idea of an emergency fund to an extreme. In fact, a good 51% of Americans say $100,000 is the savings amount needed to be financially healthy, according to the 2022 Personal Capital Wealth and Wellness Index.
Most experts recommend keeping three to six months' worth of expenses in an emergency fund, but some situations warrant more. Some experts recommend a smaller emergency fund while you're paying off debt. If your job is secure and you don't have a lot of expenses, you may be able to save less.
Senator Elizabeth Warren popularized the so-called "50/20/30 budget rule" (sometimes labeled "50-30-20") in her book, All Your Worth: The Ultimate Lifetime Money Plan. The basic rule is to divide up after-tax income and allocate it to spend: 50% on needs, 30% on wants, and socking away 20% to savings.
Finance expert Dave Ramsey recommends prioritizing an emergency fund. He suggests starting with a small emergency fund of just $1,000. After becoming debt free, he believes you should have three to six months of living expenses saved.
But economists Emily Gallagher and Jorge Sabat challenge the oft-cited savings rules in their 2019 report, “Rules of Thumb in Household Savings Decisions.” “People are usually given really high savings thresholds, like you should be saving six months' worth of income or you should have $15,000 squirreled away,” ...
If you have any debt other than a mortgage, then you just need a $1,000 emergency fund—aka a starter emergency fund. We call this Baby Step 1. It's the first piece of your money journey, so don't skip over it.
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.
By the time you are 35, you should have at least 4X your annual expenses saved up. Alternatively, you should have at least 4X your annual expenses as your net worth. In other words, if you spend $60,000 a year to live at age 35, you should have at least $240,000 in savings or have at least a $240,000 net worth.
Aim To Save $2,000
Two-thousand dollars should cover those costs. “The rule of thumb I advise my clients is to keep $1,000 to $2,000 in cash in case banking operations are shut down due to a national emergency or catastrophe,” said Gregory Brinkman, president of Brinkman Financial in Tulsa, Oklahoma.
For instance, assume that you're 25 years of age drawing a yearly salary of around Rs. 3,00,000. By the time you reach 30, you should have ideally saved up around 50% to 100% of your current salary, which comes up to around Rs. 1,50,000 to Rs.
Yes, saving $2000 per month is good. Given an average 7% return per year, saving a thousand dollars per month for 20 years will end up being $1,000,000. However, with other strategies, you might reach over 3 Million USD in 20 years, by only saving $2000 per month.
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
Keep essentials at about 50% of your pay.
Things like bills, rent, groceries, and debt payments should make up about 50% of a gross (before taxes) paycheck. Remove this money from your primary account right away, so you know your needs will be covered.
The Rule Of Thumb
For example, if your expenses amount to $3,000 each month, you should aim to save $18,000. As you build your emergency fund, aim to put 10% of each paycheck into your fund.
You should save between $12,000 and $24,000. However, you may want to adopt the 3/6/9 rule instead, depending on your job situation. In other words, you may want to: Save three months of expenses if you have a steady paycheck, have no mortgage or dependents.
Another red flag that you have too much cash in your savings account is if you exceed the $250,000 limit set by the Federal Deposit Insurance Corporation (FDIC) — obviously not a concern for the average saver.
A sum of $20,000 sitting in your savings account could provide months of financial security should you need it. After all, experts recommend building an emergency fund equal to 3-6 months worth of expenses. However, saving $20K may seem like a lofty goal, even with a timetable of five years.
For most people, $50,000 is more than enough to cover their living expenses for six full months. And since you have the money, I highly recommend you do so. On a different, and equally important note, when you set up an emergency fund, it should be separate from any other savings.
If you want to be financially sound, you need a long-term plan. The 12-month emergency fund is a safe method to stay in the clear and not worry about going into debt. It's less about having a year's worth of money available in the moment and more about how you can cut back on expenses and make the right moves.