Updated: Mar 1, 2021
Establishing an appropriate financial safety net has never been more important than it is today.
A right sized emergency fund can support you and your family through difficult financial and economic times. However, there is no one size fits all amount when it comes to establishing such a fund. Most experts offer varying perspectives on just how much money you should set aside as a buffer. But they do all agree that the benefits of establishing an emergency fund cannot be understated. In a sense, that’s a good thing. It puts you in the driver’s seat for deciding a particular amount to save based on your particular circumstance and what makes you feel the most comfortable and secure. Although you may be left with some hesitation on where to start and what amount to aim for.
Any savings put aside for a rainy day is great. This money can help cover costs if you were to experience unexpected financial hardships. However, you should be intentional regarding your savings goals and how big of a cushion you aim to build over time to provide you with the best peace of mind for your situation.
So how much should you save in an emergency fund?
Well, the size of your fund depends on many variables, including age, job security, family income streams, current financial position, future plans and goals, individual preferences, risk tolerance, among other factors.
Below are some recommendations based on our experiences and discussions with other financial professionals, as well as strategies shared by some of our successful high net worth individuals and savvy saver clients.
Six to Eight Month Emergency Fund
Aim to save 6-8 months of basic living expenses in a dedicated emergency account that is interest-bearing, secure, and easily accessible. This is the average timeframe for most unemployed individuals to secure a new job, and this cushion can help keep you afloat during the time in between. It’s also a large enough cushion should a large unexpected financial expense arise.
Savings Allocation to Retirement
If your emergency account grows beyond 9 months of living expenses, consider allocating extra cash to retirement or brokerage accounts to achieve greater appreciation on your money and to support your retirement goals. Also take advantage of any employer offered 401(k) matching programs to at least the maximum amount that your employer will match. If you are approaching retirement, bump up your safety net to 18-24 months of living expenses to avoid having to withdraw on investments during an economic downturn.
Automate Your Savings Process
It may take many months or years to reach your emergency savings goal and that’s okay. The important part is that you instill the habit of allocating a percentage of your income to savings each month, which will move you along the path to your goal. Automation will support this consistency. Open a high-yield savings account as your emergency fund and set up automatic transfers from your paycheck or primary checking into this account at the end of each month.
Leverage Technology to Develop Personal Financials
Utilize financial technology to capture all income, expense, and transfer related cash flow activities. This technology and its automation will allow you to create custom personal financial reports that provide extraordinary real-time insights into all your financial transactions, both incoming and outgoing. You’ll be able to prepare personal financial reports, statements, and dashboards to gain visibility into your financial position, monitor income streams, keep a close eye on spending activities, and guide you towards your investment, savings, and retirement goals.
We Can Help!
The emergency cushion you save will help temper stress and anxiety should you be faced with hardships. It will allow you to have more time and gain better clarity of mind for tackling your current situation and keeping focus on future opportunities.
Mitchell Advisory Services is well positioned to be your trusted advisor as you expedite the process of building your emergency fund savings and personal financial statements. We partner with individuals to implement effective personal cash management systems and processes that:
√ Provide a clear personal financial picture
√ Optimize cash inflows and outflows to achieve financial goals
√ Ensure peace of mind regarding financial reserves and ability to achieve retirement goals
√ Track key indicators and metrics to measure progress towards financial goals
√ Put the right technology in place to build a high-performing money management system
√ Create automated dashboards and reports to provide valued financial insights