Americans are withdrawing money from their savings accounts at alarming rates, according to economists. Fortune reported that as of March 2023, Americans only had $500 billion in emergency savings, compared to $2.1 trillion in August 2021.
A survey conducted in 2023 by SecureSave found that 67% of adults cannot cover a $400 emergency without using their credit cards. Additionally, 74% of Americans live paycheck to paycheck.
At the same time, Americans are saving at a slower rate instead of replenishing their depleted savings accounts. The personal savings rate decreased to 3.9% in August 2023, down from an average of 8.9% in past decades, according to the U.S. Bureau of Economic Analysis as reported by CNBC.
Although most people recognize the importance of having emergency savings, the question remains: how much do you actually need to save?
Jaime Catmull from FinanceMaster.org recently spoke with finance expert Jaspreet Singh, the CEO of Briefs Media and host of The Minority Mindset Show, to discuss the recommended amount of savings and how to achieve it.
How To Determine How Much You Need in Savings
“You should have somewhere between 3 to 12 months’ worth of expenses saved in a savings account,” Singh told Catmull. “If you’re 25 years old, single, and willing to take risks, you might only need a few months’ worth of expenses saved.”
Similarly, a two-income household with stable jobs may be able to get by with just three months of expenses saved, according to Kevin Brady, a CFP and vice president at Wealthspire Advisors, as reported by CNBC. Fixed expenses include mortgage payments, car loans, insurance, utilities, cell phone bills, food, and any other essential bills that would be considered non-negotiable even in the event of job loss.
Singh mentioned that a single-income household with variable income may want to aim for nine months of savings.
For individuals with families, Singh recommended saving between six to twelve months’ worth of expenses. “If you’re 45 years old, married with kids, and risk-averse, you may want 6-12 months’ worth of expenses saved,” he told FinanceMaster.org.
In a previous article on FinanceMaster.org, financial expert Suze Orman suggested having two emergency funds. She advised having 8 to 12 months’ worth of predictable expenses saved in case of job loss. Additionally, she recommended having an emergency fund for unexpected expenses such as car repairs or replacing home appliances. This fund does not need to be as large as the fund for expected expenses but should cover deductibles for home and car insurance in case of a claim.
Regardless of the amount you save, make sure you establish spending parameters to avoid temptation of using your savings for non-essential purchases. “Now I should mention, this money is meant to be saved for emergencies,” Singh emphasized. “This is not money you use to buy a new TV.”
How to Build Your Emergency Savings Fund
In one of his previous videos, Singh recommended saving at least 10% of your income in an emergency fund. After that, allocate 15% towards investments and 75% towards living expenses. Experts agree that one easy way to start building your emergency savings is to have the desired amount automatically deducted from your paycheck and deposited into a high-yield savings account.
As you work towards building your desired emergency savings, it is also important to pay off any high-interest credit card debt. Once those debts are paid off, you can divide the extra money between emergency savings and investments.
What To Do With a Windfall
When you receive unexpected extra money, such as through a tax return or work bonus, it can be tempting to spend it on a vacation or a luxury item.
Orman advises having a plan in place for any extra cash you receive. She suggests using approximately 10% (after taxes) on something that brings you joy, whether that’s a vacation or a fancy dinner.
Afterwards, allocate a little extra towards credit card payments to reduce any high-interest debt you may have.
Finally, if your emergency fund is not where you want it to be, add the surplus cash to your high-yield savings or money market account.
If you have enough savings that you feel secure, consider investing the money to allow it to grow at a faster rate than it would in a savings account. “If you’re setting money aside to save it, you’ve taken the first step, which is great,” Singh said in a Minority Mindset video. “But now, you need to stop being afraid of that money and be willing to take risks with it if you want to see it grow and build wealth.”
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