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How Much Emergency Savings Is Enough?

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After decades of getting by on borrowed dimes, Americans suddenly have gotten serious about saving. The about-face has been abrupt: The national savings rate has swung from an anemic 0.57% in 2007 to a downright robust 6.9% in May, according to the Bureau of Economic Analysis.

Economists are quick to point out that our newfound frugality has a dark side, given that consumer spending makes up a whopping 70% of gross domestic product. And so we begin to see the "paradox of thrift" -- the more we save, the longer it'll take the nation to recover.

Bummer, eh? Yes, it is. But what it's not is an excuse to take it upon yourself to grease the wheels of capitalism and splurge. If you've begun following the herd of money hoarders, keep it up. But of course, that leads us to the inflation-adjusted million-dollar question ...

How much is enough?
You've probably heard the rule of thumb about keeping enough money to cover three months of living expenses in your account at all times. That's sound soundbite advice, but in practice you need to apply a little more thought to personalize that dollar figure.

To come up with your ideal savings number, ask yourself:

  • Do you have dependents? How many warm bodies rely on your ability to earn a regular paycheck? The fewer people who depend on your income, the less you can safely get by with.
  • How safe is your job? Do you work in a niche industry? Is your company's business in high demand or on the demise? Do you have specialized skills that transcend industries, or are you so specialized that finding the right fit will take a while? Evaluate your marketability, and if you find it lacking, beef up by taking classes or even paying for training on your own.
  • Can you make money on your own? If company layoffs occur, could you work on contract for your former employer? Could you freelance? Are you willing to sling burgers or take in a renter to get by for a while? Your flexibility -- e.g., being willing and able to move to a new locale for work -- should be factored in to your savings equation.
  • Do you have access to credit? If you've got it, keep it -- and keep it in good shape, too. Covering emergency expenses with plastic (or a home equity loan) is not an ideal solution. Still, this is a lifeline you should preserve, should worse come to worst.

By answering these questions, you should have a much better idea of how much in emergency savings is enough for you.

And remember: When we talk about an emergency fund, we're talking actual emergencies, not "emergency vacations" or "emergency wardrobe augmentation."

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To avoid non-emergency emergency spending, columnist Dayana Yochim keeps her emergency cash stash someplace where it cannot be accessed by an ATM. The Fool has a disclosure policy.

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