A sudden job loss. A family emergency. A natural disaster. There are a lot of reasons to set a chunk of money aside. But just how big should that rainy-day fund be? It may be less than you realize.
Being prepared for a financial emergency is key, says Justin Bailey, co-founder of Vimvest, an investment app that helps users save for a variety of goals, such as vacations, retirement, and more. Bailey puts the magic number between three to six months’ worth of your expenses. “Three months of necessary expenses should be the minimum,” he advises.
“Unfortunately, more than 50 percent of people in the U.S. don’t have the extra funds on hand to cover even three months of living expenses,” says Bailey. The effort to set aside this cash is crucial, he warns. “The very nature of an emergency is that it’s unexpected, and unexpected situations often imply an unknown amount of time out of work or without an ability to generate income. You want enough time to not force significant sacrifices in living quality while searching—or waiting, in the case of our recent government shutdown—for a job or another source of income.”
Bailey recommends following the 50/30/20 rule to help set aside the necessary savings. The idea is that 50 percent of your income goes to necessities and bills, 30 percent to fun and entertainment, and 20 percent to savings. “This can change based on your situation,” he says. “For example, if your family is dependent on one income, then try to go higher than 20 percent because of the added risk should something bad happen. If you have multiple sources of income, then you are at a lower risk and therefore can save a bit less. If you are paycheck to paycheck, then put away every little bit you can to achieve three to six months of padding as soon as possible.”
If this seems impossible, take a hard look at your budget. “Cut any unnecessary luxury expenses you can live without for a while. These are habits like frequent nights out, shopping sprees, the daily Starbucks coffee, or other lifestyle luxuries,” Bailey says. “Second, find a free app or tool that can help you set a goal and start automatically saving that extra amount. Third, find a way to make even a little additional income. A part-time job, a small in-home business, or perhaps a clever way to make use of your unique talents. Each can go a long way to help put more money aside for an emergency.”