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."
(Score: 1) by Jay on Tuesday October 22 2019, @05:00PM (2 children)
You are incorrect, AC.
That would impact the number of loans and on-time payments, which are separate factors in a credit score. I'm at the top of the category on both of those things, so doing that would not make any difference.
Specifically, what I'm getting dinged for is not enough money paid down on a loan combined with too much money available to do so. If you need an education on how credit scores are calculated, you can ask your local google.
(Score: 2) by slinches on Tuesday October 22 2019, @06:25PM
How high is the interest on your mortgage? It might be smart to pay a few small chunks periodically when you can if it's relatively high (>4-5%), as long as you are able to continue to grow your savings. If you can bring down your total interest costs while improving your credit score, then it seems like a win-win as long as you can maintain a comfortable amount of savings. If the interest rate is under 4%, then it would probably be better to invest what you could otherwise put towards mortgage principle. The credit score will slowly improve on its own as the mortgage gets paid down and probably wouldn't offset the better return you can get in an investment account.
(Score: 0) by Anonymous Coward on Wednesday October 23 2019, @02:33AM
Wait, what? You're sitting on a large amount of debt, owed to several different creditors, are paying it off on the schedule the creditors suggest, AND have a large cash reserve? Do you enjoy paying unnecessary interest?
When I made my comment above I assumed that you had a single large mortgage, and perhaps student loans. You know, one or two large outstanding debts at relatively low interest. In a case like that it makes sense to be working on your cash reserve, and perhaps invest at higher return than you're paying interest on the loans. If you're floating a bunch of nearly-maxed credit cards and making minimum payments instead of dropping a wad of cash to get out from under the banks' thumbs then you should perhaps rethink your financial decisions.