Is $8,500 enough for your emergency fund?

The quick answer? It depends.

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Key points

• You need money in savings to cover unexpected expenses.
• Rather than guess how much you need, use a specific formula to calculate it.

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It’s a sad truth that many Americans are unprepared for unexpected expenses. A 2021 Federal Reserve study found that 32% of Americans don’t have enough money in savings to cover an unexpected $400 expense. But in a recent NY Sports Day survey, 56% of respondents said they have an emergency fund, with the average balance being $8,525.

Now, the reality is that this figure may not be representative of the US population as a whole, as it is derived from a limited sample. And also, it could very well be that in the aforementioned survey, a few people with larger emergency funds pulled that average up. But while an average emergency savings balance of around $8,500 may seem solid, it may not be enough for you.

How much do you need in emergency savings?

It’s easy to land on a nice round number and decide you’re ready for emergencies. You could, for example, set aside $10,000 in the bank and tell yourself that you are done with that.

Now, a savings balance of $10,000 is certainly impressive, and if you’ve worked hard to accumulate that amount, you should really be proud. But that doesn’t guarantee that $10,000 is enough to get you through a personal financial crisis.

As a general rule, you should aim to have enough money in your emergency fund to cover at least three full months of essential expenses. And three months is really the minimum. Many financial experts will tell you to save enough to cover six months of bills, while some will advise you to have up to a year of bills in reserve.

Now let’s say you have an emergency fund of $8,500 but you spend $3,500 a month on essentials like your mortgage payment, car loan payment, food, health insurance, and utilities. public. That means you’re actually $2,000 short of being able to cover three months of essential bills. And so in this case, it’s a good idea to do what you can to increase your cash reserves to at least hit that three-month mark.

Why are emergency funds measured in months? The logic is that if you lose your job, you would want to replace your income for a while until you find a job.

But you don’t just need an emergency fund for unemployment purposes. What if you own a home and need a new roof? Without savings, this repair could put you in serious debt. It is therefore important to have money to exploit at all times.

Run your own numbers

If you are unsure of the capacity of your emergency fund, review your essential monthly expenses and see their total. Then multiply that number by a minimum of three. Or you can consult an emergency fund calculator.

If you have enough money in the bank to cover all of your bills for three months, you are in good physical shape to begin with. That doesn’t mean you shouldn’t make an effort to increase your savings beyond this point, but you don’t necessarily need to start cutting spending to extremes to get there.

On the other hand, if you’re spending $2,500 a month on essential bills and only have $3,000 in savings, you may need to work harder to increase your cash reserves. This could mean limiting non-essential expenses for a while or getting a second job.

The last thing you want is to incur an unexpected expense. Checking your emergency fund and increasing it as needed could prevent this from happening.