Financial experts will often tell you the importance of saving money for a rainy day. In fact, some will even say that an emergency fund should be set up even before tackling your debt – but how much do you need to stash away in your savings account in case of a financial emergency?
The standard answer is often 3 to 6 months’ worth of your living expenses – but Suzan Orman, a former television host and savings expert, disagrees.
How Much Do You Really Need?
In 2017, Orman surprised everyone when she answered a question regarding emergency fund at the eMerge Americas conference, saying that anyone who believes that having three to six months’ worth of living expenses in their saving account is enough to secure their future is wrong. According to the financial expert, most people who lose their jobs often take more than six months to find another one.
There can be several other scenarios where a sudden emergency can deplete your savings without a warning. Take, for instance, an unexpected medical procedure that isn’t covered by insurance or a sudden economic recession like the one that happened in 2008. In such cases, having a solid emergency fund with at least eight to twelve months of living expenses can come in handy.
Orman says that even if you don’t need all the savings at once, it is important to feel as secure as possible, especially in today’s age of uncertainty where you can’t count on keeping your current job forever. The television host told the audience about the Great Recession that hit the American economy 11 years ago and caused severe investment losses. Millions of Americans found themselves without a job or even a house during the financial disaster.
The More the Merrier
Orman recalled that many businesses and tech startups went down during the recession because people no longer wanted to invest. Everything the Americans had worked for all their lives was destroyed within days, markets had collapsed because nobody wanted to touch IPOs and a severe shortage of jobs left many people without a stable income.
Ask anyone who lived through the recession if three to six months of living expenses is enough for an emergency fund and they would tell you otherwise. Major financial disasters can take more than a few months to overcome, and in some cases, it can even take years.
But the usefulness of emergency funds isn’t just limited to economic disasters. Orman says that we live in a ‘crazy world’ where anything is possible.
The only way you can combat the uncertainty around you is by making yourself as secure as possible – starting with your financial security. Having an emergency account is the best way to achieve financial stability in future, and the more you have in your savings, the more protected you are against uncertainty.
Start Saving Now
Most people rely on credit cards during emergencies thinking that debt is the same thing as savings. They are utterly wrong. Debt does the opposite of making you feel secure, Orman says. If you don’t have up to 12 months of living expenses in your savings account, don’t feel alone.
A recent survey by Bankrate showed that only 39 per cent of the Americans have less than $1,000 worth of savings in their emergency fund – hardly enough to cover a single month’s living expenses.
It’s never too late to start saving for an emergency fund, according to the financial expert. All you need to get started is a solid budget which allows you to plan your expenses beforehand so that you can direct a small portion of your earnings towards your emergency fund every month.
Saving money is a habit that needs to be developed at an early age so that you can take advantage of compound interest that can grow your fund exponentially over time. A little bit of money that you invest today can become a fortune 10 or 20 years down the road.