The New Magic Number for Emergency Savings

By Considerable | Oct 22nd, 2020

By Ruthie Darling via Considerable

According to the Government Accountability Office, 48% of households headed by someone of over 55 have no retirement savings at all. While the percentage is actually decreasing, it’s still a worrying statistic.

With regards to emergency savings, it has long been suggested that you should have at least six months’ worth of income saved in the event of job loss or a medical emergency.

However, new research by finance professors Emily Gallagher and Jorge Sabat departs from that rule of thumb. Their paper suggests there’s a magic number for emergency savings that’s a bit more modest: $2,467.

Rainy day fund

Speaking to MarketWatch, Gallagher explained, “Once you have at least $2,467 stored away for a rainy day, your probability of experiencing hardship in the next six months is low, and saving an additional dollar doesn’t seem to help reduce that probability very much.” Put another way, it’s more likely that if something goes wrong, it’ll cost you less than $2,467.

That sum is equal to about one month’s salary for lower-income families. Gallagher and Sabat used Census data and looked at 70,274 households that had incomes below 200% of the poverty level. The median household savings in the group was just $70, with a quarter having no savings at all.

The knock-on effects of this were worrying, with participants unable to pay utility bills or rent, skipping medication or even cutting back on food.

While having more money in the bank is obviously always better for emergencies, it’s at least good to know you can start building towards a more attainable magic number. You have to start somewhere. 

It’s also recommended that you store your emergency fund separately to avoid confusion.

“Emergency savings are best placed in an interest-earning bank account, such as a money market or interest-earning savings account, that can be accessed easily without taxes or penalties,” advises Wells Fargo. “The concern with placing your emergency savings in mutual funds, stocks or other assets is that they may lose value if the funds need to be accessed quickly.”