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posted by Fnord666 on Tuesday October 22 2019, @09:46AM   Printer-friendly
from the there's-always-the-day-*after*-tomorrow dept.

Economists say this is the Minimum Amount of Money you Need in an Emergency Fund:

Money experts generally encourage you to set aside three to six months' worth of living expenses in an emergency fund. Some even want you to stash away a year's worth.

After all, life doesn't usually go as planned: There could be another recession, you could lose your job, have a medical emergency or have to deal with a car breaking down. That's why, when it comes to emergency savings, "more is always better," personal finance author David Bach says.

But economists Emily Gallagher and Jorge Sabat challenge the oft-cited savings rules in their 2019 report, "Rules of Thumb in Household Savings Decisions." "People are usually given really high savings thresholds, like you should be saving six months' worth of income or you should have $15,000 squirreled away," Gallagher tells CNBC Make It. But those numbers aren't "based on much," she adds.

After crunching the numbers, Gallagher and Sabat found a more realistic amount for low-income households, specifically, to aim for: $2,467. If you have that much saved, your probability of falling into financial hardship (not being able to pay rent, bills or medical care) is low.

To get to that number, Gallagher and Sabat, who are also assistant professors of finance, used data from the Survey of Income and Program Participation (SIPP) to graph the relationship between falling into hardship in the next six months and how much you have saved as a buffer. They looked at financial information on more than 70,000 lower-income households, which the report defines as those earning under 200% of the poverty line. To put that into context, that's up to about $30,000 a year for a family of four, says Gallagher. This group represents "about 30% of the U.S. working-age population," she adds.

They found that if you have very little saved — say $200 to $500 — each additional dollar you set aside dramatically reduces your likelihood of falling into financial hardship. But once you have at least $2,467, "all of a sudden, saving an additional dollar didn't seem to be that helpful anymore," says Gallagher. "It still reduced your probability of falling into hardship a little bit, but it wasn't nearly as effective as when you were at low levels of savings."


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  • (Score: 3, Insightful) by aclarke on Tuesday October 22 2019, @02:13PM (4 children)

    by aclarke (2049) on Tuesday October 22 2019, @02:13PM (#910320) Homepage

    I guess they don't teach the concept of significant digits to economists. If one is going to attempt to come up with one $ number for every "poor person" in the entire country of the United States, there's no way it's going to be accurate down to the dollar. "About $2500" would be more correct although wouldn't make as catchy of a headline. In the end, although it offends me mathematically, it might be a savvy way to get more people to actually read the article and try saving money.

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  • (Score: 0) by Anonymous Coward on Tuesday October 22 2019, @02:34PM (2 children)

    by Anonymous Coward on Tuesday October 22 2019, @02:34PM (#910337)

    If the economists said $29600 per annum, a journalist will take his calculator and divide by 12 and get 2466.6666, rounding up to $2467.
    $2467 is nothing. It may hold my family over for a few weeks until I can get hired at a convenience store and two other jobs. At $29600 saved, I can see that be a turning point where I can be somewhat confident of obtaining professional, sort of well paying employment again within a year, before the mortgage goes into arrears and the wife or state takes the kids away.

    • (Score: 2) by EEMac on Tuesday October 22 2019, @03:59PM

      by EEMac (6423) on Tuesday October 22 2019, @03:59PM (#910370)

      Yes, but the article doesn't claim $2467 will cover all emergencies. It only claims that having $2467 in savings as an emergency fund is drastically better than $200-$500. You even say, "$2467 . . . may hold my family over for a few weeks." That's the point.

    • (Score: 2) by SunTzuWarmaster on Tuesday October 22 2019, @07:16PM

      by SunTzuWarmaster (3971) on Tuesday October 22 2019, @07:16PM (#910503)
      This is exactly what is prescribed: "$2467" will keep the lights on until you can "get hired at a convenience store and two other jobs". Naturally, $29600 will be enough to ensure that you don't really have to make any changes while you look for "professional, sort of well paying employment again within a year". Of course, $296K and a paid-for house ensure that you don't really even have to look - provided that you can live on $1K/month.
  • (Score: 2) by Osamabobama on Tuesday October 22 2019, @10:02PM

    by Osamabobama (5842) on Tuesday October 22 2019, @10:02PM (#910568)

    I would like a sensitivity analysis on that number. What would the new number be if you took one random person out of the sample? What is the range of numbers you would get if you excluded everyone in turn, one at a time?

    Or, more generally, what are the generally accepted methods of measuring the precision of that number?

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