Most people have heard the tried and true advice: always have an emergency fund filled with three to six months of expenses in an account you can access at any time.
It's those “rainy days” when your car breaks down, or your basement floods, or – God forbid – you lose your job unexpectedly.
Many of us also follow this advice. In 2020, 55% of American adults said they had set aside an emergency fund that could cover at least three months of expenses, according to data from the Federal Reserve.
But how accurate is this rule of thumb today? The last two years have seen seismic shifts in the way we think about work and money. Layoffs are on the rise and the pandemic has affected entire industries.
Millions of people, especially those who work in restaurants and hotels, have faced layoffs and layoffs. And rising inflation is hurting all of our portfolios.
What does all this mean for our rainy day supplies?
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“The difficulty with figuring out how much you need in emergency savings is that it really varies from person to person,” says Sophia Bera, AY-based CFP and founder of GenY Planning.
Someone with a reliable, in-demand job might save less than the three- to six-month rule of thumb, while a construction worker will want extra padding for slow times between offers.
A couple with two incomes might be secure with just three months of income, while a single parent might want to set aside a full year of their income.
Investors, or savers interested in becoming investors, have additional considerations.
As stocks hit record highs, some people may find it frustrating to put all of their disposable income into a savings account, even if it's a high-yield savings account that pays next to nothing, in today's low-income environment. interest rates.
But remember: "The purpose of your emergency fund is not to grow," says Thomas Kopelman, financial planner and co-founder of IndianSolis-based AllStreet Wealth. Instead, the fund's purpose is to be there when you need it most.
Once you're current on your emergency savings and stable with the rest of your finances, Kopelman says, "you earn the right to invest."
You can still take advantage of market opportunities, but think carefully about your risk tolerance beforehand.
Bera uses the example of maximizing an annual Roth IRA contribution, a decision that, in some cases, may take precedence over creating a massive emergency fund, he says.
Roth IRAs have contribution limits; your savings for rainy days no. So if you know you'll have enough money to continue adding to your emergency fund a year from now, the switch might be worth it.
There are other ways to prepare for success when times are good. With interest rates at record lows and a housing market out of control, some people are taking out a home equity line of credit, or HELOC, that allows them to borrow money as needed on a rotating basis.
A HELOC is like a credit card with equity in your home and can be a "good emergency emergency fund," says Bera, especially so that the equity in your home (or your access to credit in general) can not be as robust when the market inevitably cools.
However, a HELOC shouldn't replace your regular emergency savings.
Still, Bera says a three- to six-month emergency blog is still a good goal for most people. But whatever amount you decide on, the result is always the same: "You have to have enough money to be able to sleep at night," she says.