How much money you actually need in an emergency fund: ‘It's essential to strike a balance between ambition and practicality'

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How much money do you have set aside in case of emergencies? If you're like most Americans, the answer is, "less than I'd like."

Some 6 in 10 U.S. adults say they're uncomfortable with their level of emergency savings, according to a recent survey from Bankrate.

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. More than half of Americans — 56% — say they have less than three months of expenses saved, including 27% who say they have no emergency savings at all.

But in considering what saving three months' worth of expenses would actually look like, you may be shooting a little too high if you're basing your calculations on your current monthly budget.

After all, if you had the kind of emergency that would require you to live on your cash reserves, line items like your tennis lessons and monthly house cleanings would probably be off the table.

"When planning for an emergency fund, it's essential to strike a balance between ambition and practicality," says Alyson Basso, a certified financial planner with Hayden Wealth Management in Middleton, Massachusetts.  

While three to six months is a worthwhile goal, saving for it can feel daunting, she says. "What can make this more achievable — and ultimately more useful — is to think about saving for three months' worth of essential expenses rather than your current lifestyle costs."

Why you need emergency savings

When it comes to your financial priorities, establishing an emergency fund should be close to the top of your list, which may feel counterintuitive. When I have so many goals, needs and wants competing for my dollars, why put them in a place I hope never to use them?

The thing is, something will come up. And when it does, having an emergency fund prevents you from taking money away from your other financial goals.

"Think of an emergency fund as a buffer between you and high-cost debt or forced sale of assets in the event of unplanned expenses or income reduction," says Greg McBride, chief financial analyst at Bankrate.

In other words, if you need new tires, your dryer conks out or you get laid off, you won't have to rack up a bunch of credit card debt or cash in your 401(k) to stay afloat.

Be realistic about what you need to save

The guidelines recommended by financial planners are meant to put you in the right ballpark should you encounter a major emergency, such as a job loss. But thinking about what three months of ordinary spending looks like can trick you into thinking you need more than you actually might.

Focus on what you'd need to get by, including housing, utilities, groceries, health care and minimum payments on any debt. Strip out many of your discretionary expenses to give yourself a more accurate, and more attainable, version of your emergency budget.

"If you normally spend $4,000 a month but estimate you could get by on $2,500 by cutting non-essentials, then your three-month emergency fund would be around $7,500 instead of $12,000," Basso says. "This approach not only makes the target less intimidating but also aligns better with the reality of how your spending would change in an emergency."

How much you need depends on your unique financial situation, including your job stability, marital status and personal philosophies about money.

"There is some psychology involved," says Donnie LaGrange, a CFP with Murphy & Sylvest Wealth Management in Dallas. "Some people want a larger cushion or they worry, whereas others are OK going pretty lean and just stick to the minimum."

Generally, if you have a stable job, a high-earning spouse you can depend on for income and insurance, and other ways besides retirement savings to access cash, you can stick to the lower end of emergency savings — maybe three months of stripped-back expenses, he says. But a sole breadwinner family might lean more toward six months' worth.

But even if you're a high earner, it's worth considering how your specific financial situation might look in an emergency.

"We have one client who is a lawyer at a high level in a pretty specific niche," LaGrange says. "He thinks it would probably take him a year to find the right opportunity, so his [emergency fund] is a year's worth."

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