Are you screwing up your emergency savings?
A commonly recommended emergency fund number is not enough. Here’s how to figure out your real emergency fund number.
“Is $1,000 enough for a starter emergency fund? If not, how much should I focus on saving?”
Quick Answer
No, it absolutely is not enough.
The bare minimum in your emergency fund should be one month of bare essential living expenses. Yes, even if you’re paying off debt.
Detailed answer
There's one big problem with inking your thoughts in a book: it's hard to update!
Back in 2016, when I was writing my first book Broke Millennial: Stop Scraping By and Get Your Financial Life Together, I agreed with the prevailing logic to have at least $1,000 as your emergency fund when you were paying off debt. Sure, I added a caveat that if you had a kid or a pet you should put at least another $500 in that pot — but I've changed my mind.
$1,000 is simply not enough.
In fact, it’s bad advice. If you lost your job tomorrow, would $1,000 be enough to cover your most basic of needs? Or would you end up sinking deeper in debt because you need to finance those needs on a credit card? Or would you risk eviction or having a car repossessed because you quickly fell behind on payments within the first month of job loss? Yes, it sounds hyperbolic, but trying to figure out how to prioritize where to put your $1,000 in a crisis is a horrible situation in which to be.
You need at least one month of bare essential living expenses in your emergency savings fund, even if you're paying off debt. Of course three months is better, six months is ideal and a year's worth is baller status — but we're talking about the bare minimum you should have.
Now, before you stress out too much, remember that this is meant to be the bare minimum you need to make ends meet in a month. The funds for: shelter, transportation, food, utilities, insurance, minimum debt payments, child/pet care, and medicine. Your emergency fund number does not need to be based on your current/ideal lifestyle.
Of course, for many people (millions) it's going to take a long time to hit that one month goal. You can consider $1,000 a win on the way to putting one month into savings, but don't stop at $1,000.
Even small, incremental savings add up!
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Hi Erin...may I offer up a different POV on this? I see the emergency fund and the savings fund as two separate pots of money with different purposes.
Emergency fund: If one is living in a self-owned house/apartment and has a car, the emergency fund could be as large as the average cost of a new appliance or costly car repair job....about $2,000. If one is renting, then the car repair example is more applicable.
Savings fund: Applies more to a job loss situation. Here I agree with your take above that 3-6 months is ideal. I have always counseled my clients that during a job search, they might need 1-month job-searching per $10,000 of salary they are seeking. So it could take about 4-5 months to find a good $50k job. This rule of thumb differs depending on one's profession and location. Point being that the savings fund should be sized according to one's profession.