How Much Money Do You Need in Emergency Savings? Here's What Suze Orman Thinks
- Orman says you need 8 to 12 months of expenses in your emergency fund.
- She also says this fund should be kept in a savings account, not tied up in the stock market.
Chances are high your emergency fund isn't big enough.
There are a lot of important lessons we could learn from the pandemic, both social and economic. For many of us, perhaps the most important financial lesson of 2020 was the necessity of a good emergency fund.
Even Suze Orman, the popular personal finance guru, recognizes the fact that an emergency fund is more important than ever. Orman, who previously emphasized owning a home as a key part of building wealth, has a new outlook these days.
"Owning a home, in my opinion, is not the keystone to wealth," she said in a Yahoo Finance interview last year, adding, "It's not even wealth, anymore, that we want to create."
Instead, she says, you have to look at the root of what money does: it creates security.
"The best way for you to be secure is not necessarily having an asset that you owe money on and have to make payments on -- though it could be," she said. "The key to you being secure, will get you through -- and what got everyone through -- is an 8- to 12-month emergency fund. And that is the most important thing anybody can have."
'You need an 8- to 12-month emergency fund'
Now, it's fair to say Orman has always been a big fan of the emergency fund, touting an 8-month fund long before the pandemic. But she now emphasizes its importance even more, and has gone so far as to say a 12-month fund isn't excessive.
But what does an 8- to 12-month fund really mean? It means you should have, easily available to you, enough money to pay all of your expenses for at least 8 months, but, ideally, up to a year. And that means all your expenses, not just your rent or mortgage.
'Your emergency fund isn't an investment'
Additionally, Orman makes it clear in her interviews and blog that your emergency fund needs to be accessible. This means it shouldn’t be sitting in an investment account. Instead, it should be in a savings account.
Given the sky-high inflation we're facing right now, this could be hard to swallow. After all, a savings account that offers 1% interest is considered good these days. So, any money you park in a savings account is, essentially, losing value every day.
Well, Orman has words for you about that: "You are right, that is a lousy investment! But an emergency savings fund is not an investment," she posted on her blog. "It is security. It is peace of mind. It is protection."
She goes on to sympathize with folks frustrated by the low interest rates. But, she says it's better to be frustrated than to miss out on the peace of mind offered by a well-stocked, accessible emergency fund.
How to build your emergency fund
If the idea of saving what could be a year's income sounds overwhelming -- you're not alone. The typical American household has, at best, a few months' worth of savings.
But Orman has advice for that, too: automation. According to Orman, you should follow these three steps to build your emergency fund:
- Open a savings account.
- Give the account a specific name, such as "My Emergency Fund" or "My Safety Net."
- Set up an automatic monthly transfer from your checking account to your new savings account.
Giving the account a specific name will help with your peace of mind, since you'll remind yourself you have an emergency fund each time you log into your account. It can also help keep the account safe; there's a little more mental friction to moving money out of your Safety Net or Emergency Fund for something that isn't, well, an emergency.
How much you save each month is up to you -- and your budget. Consider your overall expenses and set up your transfer with your budget in mind. Then, Orman says, try to increase that amount by at least 10%.
"What I have seen work over many years," she writes in her blog, "is that if you go ahead and set up the bigger transfer and stick with it for a few months -- even if it seems like way too demanding a sum -- what you will find is that you adjust to having less money in your checking."
Throughout the year, you can also add to your emergency fund with any extra income or windfalls. For example, if you don't need your tax refund to pay down high-interest debt, add it to your emergency fund. Over time, your emergency fund will grow, giving you the security you need to weather the next big catastrophe.
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