Personal Growth

The Right Way to Build an Emergency Fund Isn't Always Clear

Everyone knows that you've got to have something saved up for a rainy day. If you can, anyway. But how should you go about doing that — and how will you know if you've saved enough? Here are a few of the experts' recommendations, but remember: no budget plan is one-size-fits-all.

Advice to Take to the Bank

He may not have invented the concept of saving money for a rainy day, but Dave Ramsey is largely responsible for popularizing it for today's penny-pinchers. The emergency fund, in his conception, is a cache of money that you can count on in case something comes up — your car needs repairs, your kids need braces, or a meteor strikes your garage. And then there's the big emergency: You lose your job. It's easy to see why, in the most popular conception of the emergency fund, a responsible one has a full three to six months' worth of cash. That might be what you need if unexpectedly find yourself back on to the job market.

But not everybody agrees on that exact figure. Suze Orman, for example, thinks that you need a full eight months, minimum. It couldn't hurt to have a little extra in your savings. After all, it could take a lot longer than six months to find that new job.

But while it's better to be over- than under-prepared, some experts point out that if your emergency fund is too big and it's just sitting in your savings account, then you're missing an opportunity to make it work for you. Arielle O'Shea at NerdWallet points out that if you're over-contributing to a savings account, you might be under-contributing to your 401K, and that some contextual circumstances might influence your plan. For example, if you're a single-income household and your cash flow is closely tied to the economy, then you might want to aim for Orman's suggestion. But if you have more than one source of income, and you have more than one income-earner in the house, you might not need such a huge buffer.

When the Rainy Day Comes

We've already told you about the 50/30/20 rule for budgeting, but here's a refresher: When planning your budget, allot 50 percent of your net income to needs (rent or mortgage, groceries, bills, car payments, etc.), 30 percent to wants (going out to eat, movie tickets, a nice bottle of whisky), and 20 percent to savings and investments. Now, that schema won't work for everyone. In Chicago, the average household income is just under $4,000 per month, and the average monthly expenses are also just under $4,000 — before rent. Those are some hard numbers to work with. But using those categories of needs/wants/savings can still help you make a budget that works, even if you have to adjust some numbers.

As a commenter on a Lifehacker article pointed out, however, there's one piece of emergency preparedness that often gets left out of budgeting. Besides having a fund for those disasters you just can't predict, it's helpful to have an emergency budget as well. If you're psychologically prepared for belt-tightening before disaster strikes, it can make it feel a little more manageable when it happens.

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For more budgeting guidance, check out "The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness" by Dave Ramsey. We handpick reading recommendations we think you may like. If you choose to make a purchase, Curiosity will get a share of the sale.

Written by Reuben Westmaas May 29, 2018

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