No matter what stage of life you’re in-just starting out, living off your retirement assets or somewhere in between” building a cash reserve for emergencies will help you breathe a little easier. The old rule of thumb called for enough easy-to-access savings to cover three to six months” worth of expenses. But the rules have changed. With the economy limping along and companies still cutting jobs, you should sock away more if you really want to relieve financial stress.
How much should you put aside? “Emergency funds are no longer one-size-fits-all,” says Ann Minnium, of Concierge Financial Planning in Scotch Plains, N.J. To find your number, answer two key questions: First, how long would it take you to land a new job if you lost your current one? If it would take you six months, then you need to have cash on hand equal to at least six months” worth of expenses. But if you’re a senior executive, bigger is better because it could take 12 months or longer to find a new job after a layoff.
Second, how financially secure do you feel? If you’d sleep easier knowing you have a large buffer, build up your stash to your own comfort level. (You may also have a fat home-equity line you could draw on in a pinch.) A lot also depends on your total household income and where you are in life. If you’re married and both you and your spouse work, you need a minimum of six months’ worth of expenses. If you’re single or only one partner works and you have kids, you may need a year’s worth.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you’re near or in retirement, shoot for at least two or three years’ worth of cash in a liquid account. That way, when a bear market comes growling, you’ll have enough on hand to pay your bills without selling deflated assets.
Personalize the numbers.
To hone the numbers further, figure out how much income you would need to replace each month if you lost your job. Cynthia Freedman, owner of Freedman Financial Planning, in San Jose, Cal., recommends you start by adding up what you spend on basics such as housing, food, health insurance and cell-phone service. Also, make sure you count costs that may not come up each month, such as your property-tax bill, your car-insurance payments and essential household repairs.
You may be able to cut out some work-related costs-for example, what you pay to commute, eat lunch out or dry-clean your clothes. And you may choose to cut such items as sporting-events tickets or the weekly manicure appointment. But don’t cut out all the fun. Budget some money for the movies or a restaurant meal.
Where to put it.
Stash your cash in a liquid, interest-bearing account. Among online savings accounts, Ally Bank recently yielded 1.55% . If you have a big stash of extra cash, use a multi-tiered approach, putting three months’ worth of expenses into a savings account and the rest into a ladder of certificates of deposit that mature on a staggered basis (for a list of top-yielding CDs, see page 65). No matter where you put your emergency money, set up an automatic transfer so you don’t have to think about it each month. And try putting aside more than you think you can-you can always cut back.
One final word: A little emergency money is better than none. And if you start now, your fund will grow, probably faster than you think. To see how the interest can add up over time, check out the compounding calculator at kiplinger.com/links/savingsworth.
-
Thanksgiving 2024: How Grocery Taxes Impact Your Holiday Food BudgetFood Prices Some families are navigating high food prices influencing what’s on the table this Thanksgiving.
-
9 Year-End Money Moves to Make NowBoost your retirement savings, lower your taxes and get the most out of your health insurance.
-
457 Plan Contribution Limits for 2025Retirement plans There are higher 457 plan contribution limits for state and local government workers in 2025 than in 2024.
-
What Does Medicare Not Cover? Seven Things You Should KnowHealthy Living on a Budget Medicare Part A and Part B leave gaps in your healthcare coverage. But Medicare Advantage has problems, too.
-
13 Smart Estate Planning Movesretirement Follow this estate planning checklist for you (and your heirs) to hold on to more of your hard-earned money.
-
Medicare Basics: 11 Things You Need to KnowMedicare There's Medicare Part A, Part B, Part D, Medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare — and much more.
-
Six of the Worst Assets to Inheritinheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
-
SEP IRA Contribution Limits for 2024 and 2025SEP IRA A good option for small business owners, SEP IRAs allow individual annual contributions of as much as $69,000 in 2024 and $70,000 in 2025..
-
Roth IRA Contribution Limits for 2024 and 2025Roth IRAs Roth IRA contribution limits have gone up. Here's what you need to know.
-
SIMPLE IRA Contribution Limits for 2024 and 2025simple IRA The SIMPLE IRA contribution limit increased by $500 for 2025. Workers at small businesses can contribute up to $16,500 or $20,000 if 50 or over and $21,750 if 60-63.
