How much money do you need in an emergency fund at each stage of your career
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If you’re feeling insecure amid stock market volatility, high inflation, and rising interest rates, you may be wondering how much cash you really need to have on hand.
But the right amount in your emergency fund depends on your family’s situation and needs, financial experts say.
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Still, with two-thirds of Americans worried about a recession, it’s easy to see why investors are worried about saving.
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Indeed, more than half of Americans are now worried about their emergency savings levels, up from 44% in 2020, according to a June Bankrate survey.
Many are worried about insolvency: Nearly a third of Americans have less than three months of savings spending, and nearly a quarter don’t have an emergency fund, Bankrate found.
While low incomes have made cash less attractive over the past few years, this could change as interest rates rise. And experts say saving brings peace of mind.
Here’s how much cash savings you need at different times in your career, according to financial advisors.
Double income: set aside expenses for at least 3 months.
According to Christopher Lyman, a certified financial planner at Allied Financial Advisors in Newtown, Pennsylvania, the typical recommendation for dual-income families is to save three to six months of living expenses. Rationale: Even if one worker loses his job, there are other sources of income to help the family keep up with expenses.
Lone Workers: Save 6 Months or More
Still, single-earner households could benefit from an increase in savings to six to nine months of spending, Lyman said.
Some consultants say it’s better for both singles and dual-income households to have higher cash reserves to provide “more options” in the event of a layoff. Recessions usually go hand in hand with higher unemployment, and finding a new job may not happen quickly.
Katherine Valega, CFP and welfare consultant at Green Bee Advisory in Winchester, Massachusetts, suggests keeping expenses for 12-24 months in cash.
Personal finance expert and bestselling author Suze Orman has also recommended additional savings and recently told CNBC she insists on spending eight to 12 months. “If you lose your job, if you want to quit your job, it gives you the freedom to keep paying the bills while you decide what you want to do with your life,” she said.
Entrepreneurs: reserve 1 year of business expenses
With greater economic uncertainty, Lyman recommends that entrepreneurs and small business owners defer business expenses for one year.
“The adoption of this advice has saved quite a few of our business owner clients from closing due to the pandemic,” he said.
Some people are uncomfortable with having so much money “on the side” and making nothing, especially now that stocks seem to be a great buying opportunity.
Christopher Lyman
Certified Financial Planner Allied Financial Advisors LLC
Retirees: Keep 1 to 3 Years of Expenses in Cash
With inflation soaring and interest rates on savings accounts relatively low, large amounts of cash can be a problem for some retirees. However, experts suggest keeping one to three year costs easily accessible.
“Having a sufficient cash buffer is a critical element for your money to last into retirement,” said Brett Keppel, CFP and founder of Eudaimonia Wealth in Buffalo, New York.
Having enough cash can limit the need to sell assets when the market is down, which can deplete your retirement savings more quickly.
Of course, the exact amount of cash you need to have when you retire depends on your monthly expenses and other sources of income.
For example, if your monthly expenses are $5,000 per month, you receive $3,000 from your pension and $1,000 from Social Security, you may need less cash, about $12,000 to $36,000.
“This allows you to maintain your long-term investments without the risk of selling when the stock market drops,” Koppel said.
Savings is a “very emotional topic”
There is some flexibility in the “right” amount. Money is “a very emotional subject,” Lyman admits, noting that some clients deviate from his savings recommendations.
“Some people are uncomfortable with having so much money on the sidelines and making nothing, especially now that stocks seem to be a great buying opportunity,” he said.
Others were “cautious” before and are now “completely concerned about the market,” prompting them to save significantly more, Lyman said.
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