Do You Really Need 3 to 6 Months of Emergency Savings?

I've read it (and written it, and said it) so many times that I can hear it in my sleep. It's become a semi-automatic pronouncement from personal finance gurus that "you need three to six months of emergency savings in the bank." But is that true? How realistic is that three-to-six month figure, really? Have personal finance gurus been leading us astray?

Many Americans struggle to save. The typical American savings account balance (according to The Motley Fool Ascent's research) is only $1,200. But even though most Americans do not have even three months' worth of cash in the bank, they're managing to keep paying bills and living life. Many Americans are living paycheck to paycheck, but they're apparently getting by with less emergency savings.

So what actually is the ideal emergency savings fund? Why do people need emergency savings in the first place? Let's look at the real reasons why you need some cash in the bank, and why this usual bit of "gospel truth" of personal finance advice might not fit the reality of most people's lives.

Why you need an emergency savings fund

The No. 1 reason for having emergency savings is to help keep a roof over your head and cover your bills in case of a loss of income. If you lose your job, you might need a few months to find a new one. That's why most personal finance gurus recommend keeping three to six months' worth of expenses in the bank.

But here's the thing: unless you have exceptionally bad luck in your career, most Americans have jobs. As of March 2024, the U.S. unemployment rate was only 3.8%. A strong job market means that most people can (hopefully) find a new job quickly after losing a job. And even if you get laid off, you will typically have unemployment benefits, or maybe even a severance package to cover some (or all) of your monthly budget.

Most people in America are never going to be in a situation where they suddenly have $0 of income for six whole months. Even if you can't find a new job right away, even if your unemployment benefits run out, you can start a side hustle, start driving for ride-hailing apps, get a part-time job, or otherwise start making some extra cash until you find your next full-time paycheck.

Instead of stressing out because you don't have three months' or more of emergency cash in the bank, it's time to consider a new approach.

The ideal minimum emergency savings fund: $2,467

Some recent research suggests that the ideal emergency savings fund is much lower than three to six months' worth of expenses. Emily Gallagher, a professor of finance at the University of Colorado, co-authored a study in 2019 ("Rules of Thumb in Household Savings Decisions: Estimation Using Threshold Regression") which found that the ideal emergency fund amount is only $2,467, or about one month of income for a lower-income household.

Through her research and analysis, Gallagher and her co-author found that this (smaller) emergency fund was an ideal amount to keep families from experiencing severe financial hardship. You might not need three months' worth of cash in the bank. Just one month of income in the bank could be enough to fix your car, pay for a medical expense, and avoid falling behind on rent or other bills.

That $2,467 target has probably gotten larger in the past few years because of high inflation, but the point remains the same. An emergency savings fund doesn't have to pay for your normal lifestyle for month after month. It just needs to be enough to keep your head above water until you get to a better place in life.

Bottom line

I don't mean to sound blasé about the idea of unemployment and the risks of not having enough savings. But it's just not realistic (and sounds condescending) for personal finance gurus to act like -- of course! -- everyone should be able to save thousands of dollars for emergencies. Most Americans don't have $500 in the bank. This country is an expensive place to live.

Many Americans depleted their savings accounts during the last few years of rising prices and economic uncertainty. If you don't have the perfect, ideal three to six months of emergency savings in the bank as recommended by personal finance gurus, don't feel bad, and don't beat yourself up about it. You're not alone. Instead, aim for an emergency fund in the range of $2,500. That's the minimum amount of emergency cash that people typically need to avoid the worst financial catastrophes, like getting evicted or losing the car that gets them to work.