Emergency Fund Rules Are Getting Looser: Is Dropping From 4 Months to 2 Ever OK?
Emergency funds are a topic often discussed in personal finance. And that’s for good reason, as life happens at the worst time and the last thing you want is to not have the available funds to manage the problem.
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Conventional wisdom is that you need at least three months' worth of living expenses saved for emergencies or at least six if you’re married, according to Fidelity. If you’re just starting to save money or struggling to save, that amount can be overwhelming. A recent conversation on Reddit highlights the importance of context.
Read on to find out if an emergency fund of two months' worth of expenses is sufficient.
What’s the Situation?
A 19-year-old Redditor Ringle06 was honest in their Reddit post. The person was recently in a car accident and his insurer said the car was a total loss. To replace their car, Ringle06 drained their $4,000 emergency fund and liquidated another $4,000 in savings to purchase an $8,500 car.
Ringle06 is a local government employee with minimal monthly expenses, slightly under $1,000. Additionally, they manage to invest $1,650 to $2,000 monthly, plus 403(b) contributions. The Redditor doesn't mention their income, but given their investment habits, it's clear they're financially conscious. Ringle06 is unsure whether to pause investing to rebuild their emergency fund and is considering targeting $10,000 for their new emergency savings.
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Do the Old School Rules Still Apply?
Traditional advice is that it's always best to save at least three months of essential living expenses. It’s an understandable axiom, as life is unpredictable.
Following the standard mindset means that Ringle06 should pause all investing until they replenish their emergency fund. Another Redditor, GeorgeRetire, agreed.
“Reload your emergency fund first. IMHO [sic], in today’s job market, you should have 12 months of expenses in the emergency fund,” GeorgeRetire wrote.
Many might agree, given the current state of the economy, but it’s important to remember that personal finance is personal for a reason.
Personalization Is Key To Saving
Every situation is different and what works for one person may not work for another. Personalization is necessary to protect yourself and achieve your specific goals.
Although old-school advice is to save three to six months of expenses, that may not always be what everyone needs to do.
“Your situation is low in terms of expenses, but do you expect that to change in the near future? Say you're saving on rent because you live at home…. [sic] If getting your own place is a goal, then you can plan around those future expenses,” Redditor SciguyCO wrote.
This wisdom is sound, as it highlights that Ringle06’s situation is unique. Using that reality is vital to guiding an emergency fund decision.
Should You Pause Investing To Replenish Savings?
Ringle06 is in an enviable position as they’re aggressively investing each month. One question they had was whether to pause investing to rebuild their emergency fund. Building an emergency fund should always come before investing, according to Diamond Credit Union.
Redditors were mixed on their recommendations.
“Yes. Other than making sure you capture an employer match,” Immagiver4u wrote.
Others weren’t as stark and suggested a more nuanced approach.
“I would refund in four months with that investment money. So 1k [sic] each to the EF [sic] and keep investing 650-1k [sic],” PoolMotosBowling wrote.
Again, personalization is important and giving yourself flexibility is helpful.
Is Having 2 Months of Expenses Ever OK?
Despite the usual rule of thumb that you should have three to six months of expenses in your emergency fund, it's OK to go against that at times. Having two months of living expenses in your emergency fund is fine, especially if you have a plan to rebuild it.
Per Vanguard, having just $2,000 is a sufficient emergency reserve, which covers two months' living expenses for Ringle06. Moreover, the amount of emergency savings a person needs depends on their personal situation, according to the Consumer Financial Protection Bureau (CFPB).
“If you have no CC [sic] debt and (at 19) supportive parents, slowly replenish your EF [sic], without decreasing your retirement contributions,” ElderberryAdept8095 wrote.
For people in similar situations, having a lower savings level may be OK.
Flexibility is powerful and can help you target multiple goals simultaneously. Identifying a number that fits your situation is essential; use it to guide your steps.
Having an emergency fund is integral to personal finance. The default wisdom is helpful, but fashioning it after your particular situation ensures you have what you need.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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