How much money to save in an emergency fund: 3 to 6 months of expenses

It's no secret that Americans are struggling to save.

Whether it's because wages are low, debt repayment uses our paychecks, or we spend too much, nearly 60% of Americans saved less than $ 1,000, according to a GoBankingRates survey. Most of this group has $ 0.

As a Certified Financial Planner in Training, I learned that the first step toward a sound financial plan is to create an emergency fund. Before saving aggressively for retirement or investing, the best thing to do for yourself is to build a cash reserve.

An emergency fund is money you can access quickly in case of sudden emergency, if your car needs a new transmission, if you lose your job or if another huge bill and unexpected happens in your mailbox. For the vast majority of people, it's not a question of if something will happen that threatens your financial stability, but when.

Some people will not agree that everyone needs an emergency fund. If you have more money in your bank account every month than you can spend, if you have a trust fund waiting to be exploited or if you are very risk averse, you may prefer to use your unspent money to work in the markets. . But here's the reality: for the average American, an emergency fund is the best defense against high-interest debt and we simply can not afford to risk it.

How much to save in an emergency fund

If you are looking for a benchmark for your savings, it will depend on your monthly expenses and the stability of your income. The Certified Financial Planner Standards Council teaches the following rules of thumb:

• If you are a single income householdyou need a minimum of six months of spending checked in.
• If you are a double salaryyou need a minimum of three months of expenses checked in.
• If you are a single income household with a second significant source of incomeyou need a minimum of three months of expenses checked in.

Expenses include fixed and variable costs. In other words, how much you spend each month on everything that keeps you in your lifestyle – mortgage payment, rent, car, food, credit card payments, and so on.

Once you have reached your goal, it should be more achievable than simply saving money here and there. If you do calculations, it's easy to know how much you need to save every month, every week or every day to get there. If you can boost your savings with a bonus or a tax refund, so much the better.

Where to save your emergency fund

Starting from scratch and creating a four or five digit savings account requires some discipline. I recently reached my goal of saving emergency funds using a strategy that I borrowed from my 401 (k).

Basically, I started to treat my savings as an expense and set up direct deposits from my paycheck on a high yield savings account with a different bank. from the one where I keep my checking account to avoid the temptation to tap into it in case of emergency.

Saving at the top meant that I never had to consider what I was going to cut to save more. In a sense, I worked in the back seat: I chose a savings amount that would give me a solid emergency fund in less than two years and would force me to live on what was left.

The use of a high yield savings account for your emergency fund has the advantage of earning interest on your money. Wealthfront and Betterment Wealth Advisors have toll-free, high-yield accounts with the highest rates in the market. The interest can give a little boost to your savings: the more you put in, the more you earn in interest. And most importantly, your money will be there when you need it.

It may seem impossible to save money if you strike a balance between other priorities, such as debt repayment, but an emergency fund can not wait. Whatever amount you can afford to contribute, whether $ 5 or $ 500, it will make a difference. In the end, the most important thing is to have at least some money to fall back.

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