How Big Is the Average Emergency Fund?
In the realm of personal finance, few concepts are as universally endorsed as the emergency fund. An emergency fund serves as a financial cushion, providing peace of mind and stability during unexpected events such as job loss, medical emergencies, or major repairs. But how much do people set aside?
According to J.P. Morgan, most have somewhere between 4-8 weeks of net income set aside.
Across all income ranges, the percentage of income saved is relatively stable. The average (50% percentile) is roughly 4-5 weeks of net income and the top quartile (75% percentile) is 10-12 weeks for younger workers under age 65. For those over 65, the average (50% percentile) is 8 weeks and the top quartile (75% percentile) is about 20 weeks.
For retirees, that means if you have more than 4 months of expenses set aside in cash savings, you are doing quite well compared to your peers. However, we should go a step further to calculate a personal emergency fund target.
One common rule of thumb is to save an amount equivalent to three to six months' worth of expenses. This guideline aims to cover the necessities—rent or mortgage payments, utilities, groceries, insurance premiums, and other essential bills—during a period of financial hardship. By having this buffer, you're better equipped to weather storms without resorting to depleting your long-term savings.
While the 3 to 6-month rule provides a solid foundation, it's essential to customize your emergency fund based on your unique circumstances by including large anticipated expenses. These could include:
1. Home Repairs and Maintenance: Appliances break down, roofs leak, and HVAC systems malfunction. Setting aside a separate fund for home repairs can prevent these unexpected costs from derailing your budget.
2. Car Maintenance: Regular maintenance and unexpected repairs are par for the course with vehicle ownership. Having a dedicated fund for car-related expenses can prevent financial strain when your car needs servicing.
3. Annual Expenses: Anticipate annual or semi-annual expenses like property taxes, insurance premiums, or professional license renewals. By setting aside money each month, you'll be prepared when these bills come due.
I also think it’s perfectly fine to remove expenses that you are willing to cut if needed, including:
Dining out
Gifts
Home Goods
Non-Basic Personal Care (expensive clothing, gym memberships, etc)
Entertainment (vacation, concerts, movie out, etc.)
By proactively planning for both the expected and unexpected, you'll build a solid financial foundation that can withstand life's curveballs.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.