Make Sure Your Emergency Fund Is Big Enough to Cover Wide Range of Emergencies
Three months' worth of income is often recommended but may not be enough for everyone
One of the healthiest financial habits a consumer can have is to put away money both for retirement and for a "rainy day" emergency. New surveys suggest, however, that most consumers may not be putting as much into their emergency funds as they should.
Almost everyone will experience some kind of financial emergency at some point: an unexpected car repair, medical expense, or loss of a job are some of the most common. For this reason, personal finance experts recommend having savings amounting to six months' worth of income on hand. However, how many consumers' households are actually able to save that much?
According to a recent report issued by personal finance site Bankrate, more than half of consumers do not have enough savings readily available to pay an unexpected $500 bill to repair their car.
Even consumers who do have a rainy day fund may not have saved up enough to meet today's expenses. Given how much technology is now being incorporated into cars, for instance, repairs can end up costing much more than $500.
Harris Poll conducted a survey on behalf of Oasis Financial that discovered that, even though 63 percent of survey participants claimed to have an emergency fund, 62 percent think that they would struggle financially if they experienced an interruption in income for three months.
"The survey illuminates the need for Americans to evaluate their finances honestly, with an eye toward the unexpected," said Oasis Financial CEO Ralph Shayne.
Sometimes insurance will cover an emergency situation, but the survey found that coverage can sometimes be spotty. Most consumers surveyed believe that consumers have to fight with insurance companies in order to get a fair and timely settlement.
According to Shayne, consumers should be putting a portion of their income into savings every month. Regarding the specific amount, Teachers Insurance and Annuity Association of America (TIAA) experts say that the percentage will vary for each person according to his or her goals. It recommends three to nine months' worth of current income for an emergency fund.
To get to that point, TIAA suggests that consumers calculate all the non-essential spending in their monthly budgets—such as cable television—and then divide that number in half. The result, it says, is the amount that consumers need to save each month to get the amount in their emergency fund up to an adequate level within one year.
As for the three months' income idea, Forbes says that this amount may only be enough for consumers who are single, renting, and have the option of moving back in with their parents.