You May Not Need to Save As Much in an Emergency Fund As You Think
Saving three-to-six months worth of expenses in an emergency fund is longstanding financial advice gospel. But it can seem impossible — especially if you’re struggling to cover necessities.
However, if that goal feels so out of reach that you ignore saving altogether, a new report challenging that advice might give you hope.
Economists Jorge Sabat and Emily Gallagher recently published a report suggesting the minimum emergency fund for low-income households should be $2,467 — only about one month of a $30,000 annual salary.
Putting aside more is great, but Sabat and Gallagher’s analysis found each additional dollar has less of an impact on reducing the probability of experiencing financial hardship.
The report, titled “Rules of Thumb in Household Saving Decisions,” focused on households in the bottom 30% of incomes, which tend to have less cash reserves and are more likely to rely on high-interest loans in order to survive an unexpected expense. The report used data from the U.S. Census Survey of Income and Program Participation, which obtained financial information from 70,000 households from 2009 to 2011.
That $2,467 figure isn’t a magical number that works for all low-income households, though. The circumstances or unique needs of your household may warrant more savings. The report mentions families led by single mothers and households without health insurance should save an additional $1,000.
It’s also important to emphasize that the amount of savings Sabat and Gallagher recommend is the minimum that should be on hand for emergencies.
“Our estimates should not be interpreted as an optimal savings level,” the report states.
Think about it: You may be able to cover a $500 car repair, but you probably won’t be able to stretch $2,467 if you were out of work for a few months.
While three-to-six months worth of savings is the standard recommendation for an emergency fund, Sabat and Gallagher aren’t the first to suggest a lower threshold. Popular financial personality Dave Ramsey asks his followers to save just $1,000 for emergencies before paying off debt and later bulking up savings.
If you need help building your emergency fund, this list of 44 ways to save money fast can get you started. Or consider picking up a side hustle to have more money to sock away. You can even make money at home.
Nicole Dow is a senior writer at The Penny Hoarder.