The Emergency Fund is one of the main pillars of financial security. When you have cash balances to cover unexpected expenses, you can avoid costly problems such as collecting credit card debt or withdrawing money from your retirement fund.
However, too many people do not have a solid emergency fund. Only about 60% of Americans say they have enough savings to cover an unexpected cost of $ 400, according to a study by the Federal Reserve Bank.
Although you do not have an emergency fund, you can jeopardize your financial health, the thought of establishing one is not overwhelming. thousands of dollars. If this sounds daunting, there is good news: New research shows that you may actually need much less than what you put in your emergency fund.
Your Emergency Fund: How Much Should You Save?
Economists may have found the exact amount you need to keep in your emergency fund: $ 2467.
Researchers from the Federal Reserve Bank of St. Louis and Universidad Diego Portales in Chile surveyed lower-income households (because this group of people is least likely to have an emergency fund) to see how much money is needed to reduce the risk of financial disaster in the event of an unexpected expense. They found that for every dollar a household saves up to $ 2,467, this significantly reduces the risk of experiencing financial difficulties (such as missing out on rent or bills or receiving necessary medical assistance) if an unexpected expense occurs. But for every dollar household you save more than $ 2,467, this does not have the same effect ̵
Of course, this does not mean that if you save $ 2467, you are safe from any financial obstacle that may throw you on the way. The survey itself said there was uncertainty about the exact amount, noting with 95% confidence that their number was somewhere between $ 1814 and $ 3011. In addition, it is still always possible to run into a significant unexpected expense that can quickly wipe out your emergency fund. However, the figure represents about one month of savings for a typical low-income household – well below the three to six months that most experts recommend.
Also note that the researchers based this figure on lower income households or those who fall into the bottom 30% of income distribution. Higher-income households can also struggle with emergency savings, and if you have more expensive living expenses, you may need more than $ 2500 to cover unexpected expenses.
Building Your Emergency Fund One Dollar At A Time  If you are struggling to save something in an emergency fund, look at where your money is going, whether there is room in your budget to make cuts. If you are not tracking your expenses, it is easy to spend insignificant expenses without realizing them – creating the feeling that you are more committed to money than you really are.
Once you find the extra money you can direct to your savings, make sure you keep your money in the right place. A high-yield savings account is one of the best places to create an emergency fund because you earn a relatively high interest rate, but you can still withdraw money whenever you need to. The best high-yield savings accounts earn interest of about 2% annually, which is much better than the somber part of the percentage you will probably get by putting your money in a checking account or a standard bank savings account.
Some people may choose an emergency fund because they are too focused on other financial goals. You may be trying the hardest to save for retirement, for example, and it may seem counterintuitive to change gears and start investing your money in your emergency fund. So, if you are facing multiple financial priorities, how should you balance them?
This helps you think about the consequences of not saving for every purpose. Of course, not saving for retirement can lead to problems along the way. But what happens if you don't have an emergency fund and hit a lot of unexpected expenses? Do you accumulate credit card debt that can hurt your credit score and make it difficult to save? Or maybe you can withdraw the money from a 401 (k) or IRA, which can result in a hit with an early withdrawal fee (plus it will sabotage the hard work you put into saving for retirement). Neither of these situations is ideal, but both could be avoided through an emergency fund.
This does not mean that other goals, such as retirement savings, are not important. But if an unexpected expense could potentially ruin your entire financial situation, it might be wise to prioritize your emergency fund, at least until you've raised a few thousand dollars. Then, once you know that you are not at risk of falling into debt or hurting your retirement savings, if you run into an emergency, you can return to your job for your other goals.
Establishing an emergency savings hiding place may not seem like the most important task on your priority list, but missing a rainy day fund can have a domino effect with consequences if you face significant unexpected expenses. But if you are preparing for these types of expenses by spending a few thousand dollars in savings, you can ensure that these financial obstacles will not prevent you from achieving your goals.