How Much Should You Save for Emergencies?

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As our national economic malaise threatens to drift into a fifth year (and a possible third presidential administration), more and more people seem to have come to the same conclusion: The best way to deal with future financial turmoil is to prepare in advance.

A few years ago, the personal saving rate had dwindled to barely 1 percent. Americans were spending nearly all of their disposable income. Now, however, the personal saving rate hovers at about 5 percent. That’s nowhere near the 10 percent saving rate we had during the 1970s and the 1980s, but it’s an improvement.

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(By the way, if you want a look at the raw numbers behind what Americans save, you can peek at charts and data from the U.S. Department of Commerce and the Federal Reserve. It’s pretty dry stuff unless you’re a numbers nerd like me, but this table is a little more interesting. It compares household savings rates around the world. Americans don’t save as much countries like Hungary (9.6 percent) or Belgium (12.2 percent) or Ireland (19.3 percent), but we save more than Brits (4.6 percent), Koreans (3.5 percent), and the Danish (-1.4 percent!).)

With all this saving going on, many folks are faced with a burning question: How much should we save anyhow? How much is enough to survive a financial emergency? There’s no way to know for sure, of course. And to make matters worse, not even the “experts” agree. For instance:

  • In The Automatic Millionaire, David Bach recommends setting aside three months of living expenses.
  • Other experts, including Suze Orman, recommend having enough saved to cover six months of expenses.
  • And there are other financial gurus who think you should save even more — up to an entire year’s worth of cash.

I like the approach espoused in Dave Ramsey’s The Total Money Makeover. Ramsey’s very first step is to save $1,000 in an emergency fund. Then he advocates eliminating debt via the debt snowball method. Only once your debt has been defeated does he recommend building a three- to six-month cushion. This is excellent advice.

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Where should you put your rainy-day fund? You want this money to be safe and sound. It’s not meant for investing, so don’t put it in the stock market, which is far too volatile for short-term savings. Instead, think “boring.”

I’m a fan of online savings accounts, which often offer higher-than-average interest rates, but I know many folks worry about Internet security. If you’re one of these worriers, then look into savings rates at a community bank or credit union near your home.

Whatever you do, keep saving. With your help, America’s personal savings rate can finally surpass that of the Hungarians.