According to a MarketWatch article, $2,467 may be it, based on a survey done of lower income folks.
To that I say, “Uh, no.”
The rationale is that more “shortfalls” fall under $2,500 than over it. As such, allegedly every dollar saved over $2,467 has diminishing returns.
Or rather, diminishing returns in the likelihood that you’ll need it. See, the researchers claim to have found that the “probability of experiencing hardship in the next six months is low” once you reach $2,467. Anything over that apparently doesn’t affect probability as much.
They seem to be saying that you’re less likely to need the money once you have it.
I’ve yet to hear about any emergency that cares how much you have in the bank.
Perhaps by “hardship” they mean a shortfall over and above what you have in the bank. In which case, sure, I guess it’s less likely that initially you’ll need more than you have, given the size of most emergencies.
The universe likes to pile things on. Maybe you have enough to cover one big emergency, but then your account is depleted — or at least probably significantly lower — when the next financial hit comes.
And if your life does follow the researchers’ model and you get six months (or more) of breathing room in between emergencies? Well, there’s no guarantee that you’ll have been able to rebuild your emergency fund to $2,467 by the point that the next emergency hits.
Perhaps it’s all relative?
Of course, this study was of lower income families (households below 200% of the poverty line). You could argue that they’re less likely to have bills over $2,500.
For example, a lower income means you’re less likely to own a house — and those are a major source of unexpected expenses. You’re also less likely to own a car, another area that brings some of the bigger bills. (Though arguably you may simply be more likely to own an older car, which does increase the chances of some expensive thing going wrong.)
But here’s a snag: If you’re low income then you’re also less likely to have health insurance. (Because let’s face it, jobs that pay below 200% of the poverty line often don’t come with health benefits.) So if you do get sick, you’re likely staring down a big bill.
But perhaps you do have insurance, say through the marketplace thanks to tax credits. Most plans still have high deductibles, which means an illness probably won’t be covered much (if at all). Which once again means a big bill. (Not to mention the financial hit from missing work.)
So all in all, I’d say there are still plenty of ways that bills could stack up and require more than $2,467 in six months — the timeline, as you’ll recall, the researchers seem to have set.
Give it a shot
To be clear, I’m not saying that $2,467 isn’t a good goal. Having a couple of thousand dollars is a lot better than most people manage, regardless of their income.
It’s certainly significantly more than many of the respondents. The median there was $70. Not surprising, I suppose, given that they’re low income and therefore have to build savings more slowly (if at all).
So yes, especially if you’re low-income, shoot for $2,467. Heck, shoot for $500. Be glad — and proud! — if you can save that much. I know it took hard work and a lot of tough choices/trade-offs.
But I have trouble believing, no matter what statistics say, that the likelihood of a hardship is somehow tied to the amount of money in the bank.
Not to mention that when you’re low income, it sometimes seems there’s no end to “hardships.” Because each small expense could ruin your monthly finances.
Each missed day due to an illness (or a child’s illness) could be catastrophic for the budget. Each unexpected expense — including something as small as cough syrup or a doctor’s co-pay — may mean a big trade-off. (“I need this cold medicine, but I also need milk.”)
An emergency fund of any amount will help with this, but it also means that your savings could be eroded by small expenses. Restocking the emergency fund (even slowly) means a little less money for day-to-day expenses, which eat up so much of a paycheck.
So I simply have trouble understanding how the researchers could consider hardships “less likely” when you have an emergency fund.
Slow (but unsteady)
Again, if they’re talking about having more in the bank than the bill, sure I guess that’s probably true.
But that doesn’t account for other unexpected expenses that come when you’re building the EF back up. Because you probably can’t do it in leaps and bounds on $2,500 (or less) a check. And emergencies/unexpected expenses are rarely polite enough to wait until your bank account is flush again.
All of this is to say that I heartily disagree with the idea that $2,467 is an optimal amount in an emergency fund, no matter what your income level is.
So by all means shoot for $2,467. But don’t stop there. Keep going, so-called diminishing returns or not. Because less than $2,500 is not enough to keep you safe from all of life’s vagaries.
Is 6 weeks enough?
Another study, this time done by Chase bank, found that six weeks’ worth of pay might be enough. The bank found that every five and a half years, accountholders experienced an income dip along with an expenditure spike. In those cases, six weeks’ pay seemed to about cover it, regardless of income level.
The average wage in the U.S. is a little under $47,000. So this would point to an emergency fund of about $6,000 for the average worker.
Okay, that’s great but the study was only noting when income dropped at the same time that expenses rose. There are plenty of times that your income can stay the same but your expenses can rise enough to necessitate tapping the emergency fund. Certainly, it happens more than every five and a half years.
So once again you have the issue of tapping savings, only to have to rebuild it before the next unexpected expense hits. That’s not always possible.
What is safe?
Obviously having something saved is better than nothing, I just don’t think either of these numbers is a safe end goal. Really, you need to be aware of your expenses and plan for three to six months’ worth of those.
Then again, most emergencies probably aren’t layoffs, so maybe it doesn’t matter how many months’ expenses you have. Maybe it really is just about covering unexpected expenses as they rear their heads.
In that case, how about $5,000? Is that the magic number? That would cover one big emergency (“big” here being around $2,467 per the researchers) and any additional little unexpected expenses that rear their heads while you’re trying to build the emergency fund back up.
Or is all of this moot?
Is the point of the initial study more that $2,467 is ideal or just ideal given the people’s financial circumstances? That is, is it all they need or just realistically all they can afford? Even $2,467 is an awful lot to ask of people who are low income. It’s not impossible, but it’s a big ask.
Even if they were able to put away $200 a month — which is a lot of money for someone who’s low income — then it would take more than 10 months to build up that much. And that’s assuming no unexpected expenses reared their head while the fund was being built up.
So perhaps even $2,467 isn’t ideal for low income folks. Maybe $500 is. Or $1,000.
For me, I’d say $10,000 feels safe. But maybe there is no ideal number that will really keep you protected from life’s not-so-little surprises. Well, anything short of $100,000 or more, anyway.
Do you think $2,467 is enough of an emergency fund for lower income earners? What’s a safe number to you?