Your 6-Month Emergency Fund Isn’t Enough: Here’s Why
Written by
Kerra Bolton
Edited by
Amber Barkley
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Financial experts often advise individuals to keep three to six months’ worth of cash on hand for emergencies.
However, inflation, economic uncertainty and volatility in the job market might make a static savings goal unsustainable, leaving individuals feeling vulnerable even if they’ve reached their target.
The bottom line is that your six-month emergency fund isn’t enough. Here’s why.
Next, find out what you should do when your emergency is bigger than your emergency fund.
Inflation
According to the latest U.S. Bureau of Labor Statistics data, the cost of most everyday goods and services rose by 3% last year.
“Inflation erodes the purchasing power of cash, meaning that the same emergency fund saved five years ago may not cover as much as today,” said Melissa Pavone, founder at Mindful Financial Partners. “Essential costs such as groceries, rent and utilities have all increased, making it crucial to adjust savings accordingly.”
She explained, “A stagnant emergency fund [could] leave individuals short in a real crisis. So, it’s important to periodically review and adjust savings targets to reflect current expenses. Your savings goal should be based on your lifestyle, job security, financial obligations and economic conditions.”
Unforeseen Events
Hurricane Helene and the Southern California wildfires devastated communities in the U.S. within four months of each other, so the financial impact of unforeseen events is more prevalent now than ever.
“Natural events like hurricanes, wildfires, floods and more can lead to costly repairs, evacuation expenses or temporary housing,” said Candice Towers, a financial wellbeing program manager at Lake Trust Credit Union. “These types of events are often unpredictable and can strain both your budget and emergency savings.”
Individuals also tend to overlook car and home repairs and medical expenses when setting six-month emergency savings goals.
“Additionally, job displacement or layoffs may last longer than before, increasing the need for a larger financial cushion,” Towers said. “Consumers should not only think of emergency savings as a short-term solution, but as a long-term strategy to protect against inflation, job uncertainty, unexpected expenses and rising costs.”
Underestimating How Much You’ll Need
Individuals often underestimate how much they need and often lack the liquidity they need to get through emergencies without doing damage or incurring unnecessary debt.
Evan Rothschild, principal and wealth advisor at Adero Partners, a financial planning, investment management and tax services firm, said people should let their money work for them while building their emergency savings to ensure they have enough to cover emergencies.
“Most banks do not offer anything beyond a very modest interest rate, even in savings accounts,” Rothschild said. “You should be able to find 4% plus even after the Fed lowered rates at most brokerage money funds and some online banks. This extra interest will allow you to keep up with inflation by letting your money work for you a little.”
Emergency Savings Is Not a Fixed Goal
Erika Kullberg, a personal finance expert and attorney, said individuals often think of emergency savings as a fixed goal instead of a dynamic fund.
“When the economy is less predictable and secure, and costs keep rising, our savings targets should be adjusted in response,” Kullberg said. “Instead of a blanket recommendation, ideally, we need to base our emergency funds on personal factors like job stability, income sources and, of course, our own monthly expenses.”
Kullberg said individuals should consider aiming for at least nine months of essential expenses and keep a portion of those funds in a high-yield savings account.
“You can also look at diversifying your income sources to reduce relying on a single paycheck and provide some safety against job loss,” she said. “Automating your savings, as well as cutting down on discretionary spending, can also help boost your financial security.”
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