An emergency fund is one of the cornerstones of financial security. If you put aside a supply of cash to cover unexpected expenses, you can avoid costly problems such as increasing credit card debt or withdrawing money from your retirement fund.
Too many people do not have a solid emergency fund. According to research by the Federal Reserve Bank, only about 60% of Americans claim to have enough savings to cover $ 400 in unexpected expenditures is overwhelming. Most experts advise saving enough to cover the cost of living for three to six months, which is likely to amount to several thousand dollars. If that sounds intimidating, there is good news: new research has shown that you may need much less than your emergency fund.
Economists may have found the exact amount in their emergency fund: $ 2,467.
Researchers from the Federal Reserve Bank of St. Louis and the Universidad Diego Portales in Chile surveyed lower-income households (as this group of people is less likely to have an emergency fund already) to determine how much money is needed to achieve this Reduce the risk of financial disaster in the event of unexpected expenditure. They found that a budget for every dollar that saves up to $ 2,467 greatly reduces the risk of financial difficulties (such as skipping over the payment of rents or bills or not taking the necessary medical care), if unexpected Expenses incurred. But for every dollar that households save more than $ 2,467, this does not have the same effect ̵
That does not mean, of course, if you save $ 2,467 and you are protected from any financial hurdle that could get in your way. The research itself said there is uncertainty in the exact amount, with 95% certainty noting that the number is somewhere between $ 1,814 and $ 3,011. In addition, it is still possible for you to face significant unexpected costs that can quickly wipe out your emergency fund. However, the figure represents a saving of about a month for a typical low-income household – well below the three to six months recommended by most experts.
Also note that researchers have referenced this figure to a lower income household or those who fall into the lower 30% of the income distribution. Households with higher incomes may also struggle with emergency savings. If you have more expensive living expenses, you may need more than $ 2,500 to cover unexpected costs.
Build your emergency fund for one dollar each.  If you're having trouble saving something in an emergency fund, then you should look at where your money can fit into cuts in your budget. If you do not track your expenses, it's easy to cover up unnecessary costs without realizing it. You feel like you have more money than you really have.
Once you have found some extra money you can put on your savings, make sure that you keep your money in the right place. A high-yield savings account is one of the best places to set up an emergency fund, as you earn a relatively high interest rate. However, you can withdraw the money whenever you need it. The best high yield savings accounts earn interest rates of around 2% per annum, which is far better than the dire fraction of a percentage that you're likely to get if you deposit your money into a checking account or a standard bank savings account.
Some people may be missing the emergency fund because they are too focused on other financial goals. You may be more likely to save for retirement, and it may not be intuitive to change gears and put your money in your emergency fund. So, if you face multiple financial priorities, how should you balance them?
It is helpful to think about the consequences if you do not save for each goal. Of course, if you do not save for retirement, this can later cause problems. But what happens if you do not have an emergency fund and are faced with significant unexpected costs? Do you accept credit card debt that can affect your creditworthiness and make saving more difficult? Or you may be removing the money from your 401 (k) or IRA, which may result in a premature withdrawal fee (and sabotaging the hard work you put into saving for retirement). None of these situations is ideal, but both can be avoided with an emergency fund.
This does not mean that other goals, such as saving for retirement, are not important. But if an unexpected issue could potentially ruin your overall financial situation, it may be wise to prioritize your emergency fund, at least until you've lost a few thousand dollars. If you then know that you do not run the risk of being in debt or putting your retirement assets at risk when faced with an emergency, you may be able to get back to your other goals. The most important task on your priority list, but the lack of a rainy day fund lead to a knock-on effect with consequences if you are faced with significant unexpected costs. However, if you are preparing for this kind of spending by making savings of a few thousand dollars, you can ensure that these financial obstacles will not affect your goals.