How Much Money Should You Have in an Emergency Fund?

Wow, 50% of Americans say they do not have an emergency fund to cover a $2000 expense such as an unexpected bill for car repair, home repair, a medical emergency, or legal expenses.

Of course no one can predict those bills, that’s why a person has an emergency fund. Yet cars do break down, roofs leak, and neighbors can sue.

Many who declare bankruptcy have said the beginning of their financial troubles was an unexpected illness with high medical bills. Even with health insurance the amount you are expected to pay can add up.

Building an emergency fund is not just for those with bigger salaries. If anything, it’s people with smaller salaries that need it the most. Even financial advisors who stress getting out of debt say to first build your emergency fund. You can’t afford to be without it.

So how much is enough? No one knows what expenses could pop up, but the bare minimum seems to be $1,000. Most advisers used to say to have about 3-6 months salary in the emergency fund. In 2015, the average time to find a new job is 7 months. The older you are the longer it usually takes to get a new job. For those over 55 it often takes a year. At the minimum you need to set aside whatever it would take to pay your basic bills for in case you lost your job.

Without an emergency fund, when an emergency hits people use credit cards more. Some people already don’t pay off their balance in full each month so they can’t get much relief from a credit card when an emergency does come. Once a person starts carrying a balance on a credit card each emergency just increases the problem and often a downward spiral results.

Some people would try to get a home equity line of credit or even a reverse mortgage. The time to apply for a home equity line of credit (HELOC) is while you still have a job and before you need to use the money. It can be used as a back-up emergency fund and there is no penalty for having it and not using it. It can be revoked at anytime by the issuer.

I don’t like a reverse mortgage unless there is no other way. You’d be giving away your home just to get $2000 cash for immediate expenses.

Many people would ask family and friends to help them in an emergency. While many of us would want to help, we also hope that it’s not necessary. Consider such “loans” as gifts if you give any.

As young people graduate this spring, please advise them to get health insurance and to start building that emergency fund. Hopefully these things will save them a lot of grief.

Click on any of the labels below this post for more ideas on emergency funds and being money smart.