Some of the most common questions we receive from clients is ‘how am I doing’? Will I be able to retire? How do I compare to others my age? While there is no one right answer, we’re hoping to shed some light in this post about emergency fund milestones. In addition, we conducted a poll on LinkedIn and asked our followers to answer a question regarding their emergency fund savings. The results were surprising (on the upside) although possibly biased. Regardless, saving adequate funds for an emergency, large purchase or retirement is an important undertaking.
A financial emergency can include job loss, medical bills, a car or home repair, a deep pay cut, or any other financial setback. An emergency fund can include your regular checking and savings account but should be stored separately. Most banks allow you to have more than one savings account, which could be your first step to setting up an emergency fund. This fund can house cash and cash equivalents and is designed to have high liquidity with a very low level of risk.
Most planners recommend that an emergency fund contain at least three to six months of living expenses. For a couple or individual with inconsistent cash flows, 12 months may be better. Before building your retirement nest-egg or purchasing a home, building an emergency fund is vital. Below is a graph showing annual expenditures by age group.
Using the graph above, we can pull the annual expenditures for the provided age groups. Given that the recommended amount for an emergency fund should consist of 3 to 6 months of living expenses, we can calculate an acceptable sum for an emergency fund:
- Less than 25: $7,500 to $15,000
- 25 to 34: $12,000 and $24,000
- 35 to 44: $14,500 and $29,000
- 45 to 54: $15,000 and $30,000
The later years of life tend to reflect an overall decrease in total expenditure. For that reason, one may not need to have as robust an emergency fund as was once needed.
- 55 to 64: $14,000 to $28,000
- 65 to 74: $11,500 to $23,000
- 75 and over: $8,500 to $17,000
It is important to remember that these examples are based on national averages, and your emergency fund may look different. It is a good budgeting habit to calculate your monthly living expenses, which can be used to estimate your ideal emergency fund. Additionally, about 5% of the expenses surveyed are categorized as entertainment, something which might be prudent to forgo in the case of an emergency.
The AdvisoryOne Group conducted a poll on LinkedIn in August (2022) to see how much our followers had in their emergency funds. Of the 35 people that responded:
- 23% had 1-3 months in their emergency fund
- 12% had 3-6 months
- 65% of them had more than 6 months in an emergency fund.
The responses from this poll show that every individual has a different amount of money that could be saved. Your lifestyle and monthly budget will determine your emergency fund needs. You can reach savings goals by creating specific target amounts and dates. Another good idea is to try and use the 50/30/20 rule. Check out our other blog post to learn more about this rule.
Having an emergency fund helps you avoid these four routes that could negatively impact your wallet.
- Sell risky investments: You do not want to have to pull money out of a portfolio at inopportune times due to volatility and the potential for taxes.
- Pull from an IRA: Dipping into a retirement account before age 59 and ½ could lead to additional taxes and a 10% penalty.
- Use a credit card: Interest rates on your credit card could put you in a bind by creating more debt that could have been avoided.
- Reach out to family and friends: This option is never fun and although it may not sound too bad, it can sometimes be more difficult than necessary.
If you haven’t started an emergency fund, today is the best day to start. If you’re feeling far behind about your savings, be patient. You should start small — don’t expect to pile up savings overnight. It may take many years of diligent saving to get to the point where your emergency cushion is built up to handle six months of expenses and you’re ready to focus saving for longer-term goals like retirement or college funds. Start by saving one month’s worth of expenses and go from there.
Are you interested in creating a budget or determining if your emergency fund is adequate for a rainy day? Every individual’s emergency fund will be unique to them, so start a discussion with one of our Financial Advisors at firstname.lastname@example.org or check out our website at https://www.advisory-one.com/contact.
Consumer expenditures vary by age : Beyond the Numbers: U.S. Bureau of Labor Statistics (bls.gov)
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.