You never know when a surprise expense or layoff might wreak havoc on your finances. That's why it's so important to have a solid emergency fund.
Data from the Federal Reserve reveals that only 68% of U.S. adults feel equipped to cover an unplanned $500 expense by tapping their savings. That means a good 32% of Americans are probably behind in the emergency fund department. As a general rule, most people need their emergency funds to be able to cover three to six months of essential living expenses.
But for some people, that may not be enough. And there are people out there who choose to maintain a 12-month emergency fund for added protection. But is that a sum you should aim for?
Not everyone needs 12 months' worth of cash in the bank
The problem with keeping too much money in savings is that you lose out on the opportunity to grow it into a larger sum over time. A savings account might give you an average yearly 2% return on your money over several decades. But the stock market might give you an average annual 10% return.
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Let's say your essential bills come to $3,000 a month, only instead of settling for a six-month emergency fund, you sock away $36,000 to cover a full year of bills. Over 30 years, that extra $18,000 might grow into about $32,600 in savings if you earn an APY of 2.00% on it. But with a stock portfolio, assuming a 10% rate of return, that extra $18,000 might grow into $314,000.
That's why you don't want to overfund your emergency savings too much. Rather, it's good to strike a balance.
If you're someone with a typical job and typical expenses, a three- to six-month emergency fund will probably suffice. But there are exceptions.
When it pays to consider a 12-month emergency fund
There are certain scenarios where 12 months' worth of savings is appropriate. For one thing, if you're retired or on the cusp of retirement, it's a good idea to have that much cash in the bank.
The reason? In retirement, you may have to tap your investment portfolio regularly so you have money to live on in the absence of a paycheck from work. If the market crashes, it would be a bad time to cash out investments. So if you have a year's worth of expenses in savings, you'll buy yourself that much time to ride out a stock market downturn without having to immediately lock in losses.
Another scenario where you may want a 12-month emergency fund is if you have a very unique job. Let's say your job is to source coffee internationally. There probably aren't too many people who do what you do. If you're a bookkeeper or an engineer or a store manager, you probably don't need a 12-month emergency fund. But if there aren't many iterations of your job, then 12 months of savings is a good idea.
Finally, if you're self-employed, you may want to consider a 12-month emergency fund in case a lot of your income comes from a few core clients and they all end up making budget cuts in short order. When you're self-employed, you don't get severance or unemployment benefits to fall back on, so extra savings may be in order.
All told, it's smart to save adequately so you're protected in the event of an unplanned expense or financial hiccup. But overfunding your emergency savings could cause you to lose out on the gains you might enjoy by investing. So don't rush to amass a 12-month emergency fund unless there's a good reason for it.
FAQs
On this front, many money experts would tend to agree with the public. Financial planners generally recommend stashing three to six months' worth of living expenses away in an emergency fund.
Do I need a 12 month emergency fund? ›
As a general rule, most people need their emergency funds to be able to cover three to six months of essential living expenses. But for some people, that may not be enough. And there are people out there who choose to maintain a 12-month emergency fund for added protection.
Is a 12 month emergency fund too much on Reddit? ›
3 months is minimum you'd like to have, and 6 months is ideal. Anything beyond this shouldn't be liquid waiting about to for unlikely events doing nothing.
How many months of income do you need for an emergency fund? ›
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.
Is $5,000 enough for emergency fund? ›
For many people, $5,000 would be inadequate to cover several months' expenses in the event of job loss or an expensive emergency. If that is the case for you, $5,000 would not be considered an overfunded account.
Is a 6 month emergency fund too much? ›
Income shocks tend to be more expensive and last longer than spending shocks. They also tend to happen less frequently. To prepare for income shocks, many experts suggest keeping enough money in your emergency fund to cover 3 to 6 months' worth of living expenses.
Is a 3 month emergency fund enough? ›
Starter emergency fund: If you have consumer debt, you need a starter emergency fund of $1,000. This might not seem like a lot, but it's just a temporary buffer while you pay off that debt. Fully funded emergency fund: Once that debt's gone, you need a fully funded emergency fund of 3–6 months of expenses.
Is 30k too much for emergency fund? ›
Most of us have seen the guideline: You should have three to six months of living expenses saved up in an emergency fund. For the average American household, that's $15,000 to $30,0001 stashed in an easily accessible account.
Is $20000 too much for an emergency fund? ›
Is $20,000 enough for an emergency fund? A savings account with $20,000 is a good starting point for creating a substantial emergency fund. This will help you financially should an unexpected situation arise. However, if you face an extreme situation, $20,000 may only cover limited expenses.
Is $10,000 too much for an emergency fund? ›
When asked how much money they'd need to save for a financial emergency to avoid additional stress, 40% would feel comfortable having a modest amount — below $2,500 — set aside. 21% say they'd need at least $10,000 saved to feel secure.
Once you have this amount in your emergency savings account, you can focus on growing it to your personal savings target while also tackling other goals. Those general saving targets are often called the “3-6-9 rule”: savings of 3, 6, or 9 months of take-home pay.
What is the rule of thumb for emergency fund? ›
Keep in mind that the standard rule of thumb for an emergency savings fund involves anywhere between three- and six-months' worth of living expenses. Don't make the mistake of confusing this with six months of income, which could either be far higher or far lower than it takes to get by.
What percent of Americans have 10k in savings? ›
Majority of Americans Have Less Than $1K in Their Savings Now
| How Much Do Americans Have in Their Savings Accounts? | | |
|---|
| $1,001-$2,000 | 10.60% | 9.81% |
| $2,001-$5,000 | 10.60% | 10.64% |
| $5,001-$10,000 | 9.20% | 9.51% |
| $10,000+ | 12.60% | 13.48% |
4 more rowsMar 27, 2023
How many Americans have $100,000 in savings? About 26% of U.S. households had more than $100,000 in savings in retirement accounts as of 2022, according to USAFacts, a nonprofit organization that analyzes data from the Federal Reserve and other government agencies.
How many Americans have no debt? ›
Around 23% of Americans are debt free, according to the most recent data available from the Federal Reserve. That figure factors in every type of debt, from credit card balances and student loans to mortgages, car loans and more. The exact definition of debt free can vary, though, depending on whom you ask.
How many Americans have no savings? ›
According to our survey, roughly 28% of Americans across all four generations currently have less than $1,000 in personal savings, including emergency funds, non-workplace retirement accounts and investments.
How much should a 30 year old have in emergency fund? ›
Common personal finance advice recommends keeping three months of expenses in a savings account in case of a job loss or other emergency, and Bankrate's data shows most people agree with that. The vast majority (89 percent) of U.S. adults say they would need at least three months of expenses saved to feel comfortable.
Is $10,000 enough for emergency fund? ›
When asked how much money they'd need to save for a financial emergency to avoid additional stress, 40% would feel comfortable having a modest amount — below $2,500 — set aside. 21% say they'd need at least $10,000 saved to feel secure.
Is an 8 month emergency fund good? ›
How much emergency fund should I have? Sudden car repairs, medical emergencies or job loss can all lead to unexpected debt if you're not prepared. It's difficult to predict how much these or other emergencies could cost — but three to six months' worth of expenses is a good goal.
