How Much Do You Really Need for a Rainy-Day Fund?

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As a consultant who works for herself, Cami Zimmer knows that she has to be ready for anything, especially when it comes to often changing client demands. In January 2016, Zimmer started a new consulting contract working alongside a prominent CEO. The position, and the sizable income that came with it, was supposed to last at least a year. Three weeks into it, though, the CEO was let go and the company decided that her services were no longer needed. “I thought everything was going to be dandy for the year,” says the president of Campaign Touch, a Minneapolis-based marketing consulting firm. “And then I lost that salary.”

Many people might worry if their income outlook was altered, but Zimmer remained calm. Why? Because she was prepared. She had two years’ worth of salary stashed away in a rainy-day fund that she knew she could tap into until she found more work. “Having that money made things a lot easier to deal with,” she says.

While Zimmer had been building up her fund for years, according to Bankrate.com, only 44% of Americans have more than three months of savings put away in an emergency fund. Most know they need one – they’re aware that medical bills pop up, that cars need to be repaired and work situations can change – but many struggle with identifying how much they need to save, says Paul Golden, a spokesperson for the National Endowment for Financial Education.

Cover the basics

The mistake most people make is thinking that they need to replace several months of salary, which is difficult for most Americans. Golden points out that if you saved 10% of your take-home pay per year, it would take five to seven years to accumulate six to nine months of salary, and that’s without touching it.

Setting such a large goal is too daunting for most, he says. Zimmer admits that two years of savings is unusual, but she’s made it a priority because, as a hands-on business consultant, it might take her several months, if not longer, to find a new client.

A better approach is to save enough money to cover basic necessities, says Golden. That includes mortgage payments, grocery bills, car expenses, a roof repair – anything that would cause a crisis if you couldn’t afford the expense. Going out to eat twice a week should not be considered a basic expense, he says.

Set manageable goals

It’s also important to create manageable goals. While many people suggest covering three months of expenses, Golden says to start with one. Once you have the first month covered, then start saving for two months, then three and so on.

Breaking it down in smaller chunks will also make it easier to wrap your head around the idea of a rainy-day fund. Thinking you need to save $50,000 for some unknown emergency expense can be overwhelming, he says

Plan for a variety of emergencies

People also make the mistake of thinking that an emergency fund is for a job loss, when in fact, other kinds of emergencies, like a roof repair or new car purchase, are more common.

If you’re not worried about losing your job, then planning with these expenses in mind – maybe it’s $8,000 to deal with a potential basement flood – rather than simply covering a few months of expenses, could make it easier to save, says Stephanie Holmes-Winton of The Money Finder, a website for financial planners.

Cap your emergency savings

Some people also forget that rainy-day funds aren’t like retirement funds: You don’t need to save forever. Two years will cover nearly any emergency that comes Zimmer’s way, so she no longer puts money into her rainy-day account.

How much is enough is an individual preference – it can depend on your work situation, your health, the age of your house or car – but six months’ worth of savings is a good guideline, says Holmes-Winton. As soon as those funds get used, though, you should start building them back up right away, he adds.

Keep your money liquid

Where to put your money is also important. Generally, you’ll want to use a savings account, where it’s separate from your everyday dollars but is still liquid enough that it can be used at a moment’s notice.

A savings account can also provide a better interest rate than a basic checking account. “If you keep it away from a checking account, you’ll feel more confident that you won’t spend the money on daily things,” says Holmes-Winton. “And you might get a better rate, too.”

Fortunately for Zimmer, she found another client soon after she was let go, so her emergency fund remains intact. But having a rainy-day fund does make life that much easier, she says. “I go to bed every single night with peace of mind,” she says. “I know that if something were to happen, I’d be fine.”

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