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An emergency fund is a key part of your financial plan, especially during times of economic uncertainty. But the right amount of money depends on your household and occupation, according to financial experts.
Most Americans are unprepared for a financial emergency, according to a recent CNBC/Momentive survey of more than 4,000 American adults. More than half of Americans have no emergency fund and 40% of those have less than $10,000, according to the findings.
While experts often suggest keeping enough money to cover three to six months of living expenses, others take a more nuanced approach.
“Rules of thumb overlook a number of important factors,” said Certified Financial Planner Andy Baxley of the Planning Center in Chicago.
“The volatility of the industry you work in, the stability and predictability of your income streams, and whether or not you are self-employed are just a few examples,” he said.
Consider your job security
According to Niv Persaud, CFP and managing director of Transition Planning & Guidance in Atlanta, sufficient emergency savings depends on how long it will take to replace your current income after a job loss.
Despite the threat of recession, the labor market remained strong with unemployment rate at 3.4% in April, tied with the lowest level since 1969. While sectors such as technology, financial companies, health care and retail have been hit by layoffs in 2023 doesn’t mean workers are scrambling for jobs.
Some 55% of workers laid off in December or January found new jobs in late January, according to a ZipRecruiter investigation. On average, it took seven weeks for workers to find a new job, with employees in advertising and marketing, the automotive industry and technology being the most likely to have already found a new position.
Still, “the job search process is longer for people with higher incomes,” said Persaud, who urges clients to keep nine months of emergency reserves – including rent or mortgage, utilities utilities, food and other necessary costs – for two-income households and one-year expenses for one-income families.
Kevin Brady, CFP and vice president of Wealthspire Advisors in New York, also considers job security for his clients, aiming for three months of spending for a two-income household with secure jobs, or six months of spending for a family. single income. with secure employment. However, a single-income household with “highly variable earnings” can aim for nine months of emergency savings, he said.
Add a buffer for highly correlated earnings
Dual-earners may also consider the degree of correlation between each partner’s income. “If you both work in tech sales, the likelihood of both of you losing your jobs at the same time is higher than if, say, one of you was a professor,” Baxley explained. When income is highly correlated, he generally recommends a larger emergency fund.
Of course, the right number may also depend on your personal preferences. “If a calculator says you should have $20,000 in emergency reserve but you won’t sleep at night on less than $40,000, then $40,000 is probably the right number.”