How Big Should Your 'Rainy Day' Savings Account Actually Be?

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This article is part of Money's January 2022 digital cover, which features 22 ways to make 2022 the best money year of your life. Browse all 22 articles here.

Most people have heard the tried-and-true advice: Always have an emergency fund filled with three to six months' worth of expenses in an account you can access at any time. It's for those “rainy days” when your car breaks down, or your basement floods, or — god forbid — you lose your job unexpectedly.

Many of us have followed that advice, too. In 2020, 55% of adults in the U.S. said that they had set aside an emergency fund that could cover at least three months' worth of expenses, according to data from the Federal Reserve.

But how accurate is that rule of thumb today? The last two years have brought seismic shifts in the way we think about work and money. Job quits are hovering at an all-time high, and entire industries have been thrown into flux by the pandemic. Millions of people, particularly those in restaurant and hospitality jobs, have faced furloughs and layoffs. And rising inflation is making a dent in all of our wallets.

What does all this mean for our rainy day stashes?

Well, that depends.

“The tough thing about figuring out how much you need in emergency savings is that it really varies depending on different people's situations,” says Sophia Bera, a CFP and founder of Austin-based GenY Planning.

Someone with a reliable, in-demand job might be able to save less than the three- to six-month rule of thumb, while a gig worker will want extra padding for the slow periods in between windfalls. A married couple with dual incomes might be safe with just three months of income socked away, while a single parent might want to put away a full year of their income.

Investors—or savers interested in becoming investors—have additional considerations.

With stocks hitting record highs, some people might find it frustrating to park all of their disposable income in a savings account — even if it's a high yield savings account — that earns basically nothing in today’s low-interest rate environment.

But remember: “Your emergency fund’s goal is not to grow,” says Thomas Kopelman, a financial planner and co-founder of Indianapolis-based AllStreet Wealth. Rather, the goal of the fund is to be there when you need it most. Once you’re in a good place with your emergency savings and stable with the rest of your finances, Kopelman says, “you earn the right to invest.”

You can still take advantage of opportunities that present themselves in the market, but think carefully about your risk tolerance beforehand.

Bera uses the example of maxing out an annual Roth IRA contribution — a move that, in some cases, can take precedence over building up a bulky emergency fund, she says. Roth IRAs have contribution limits; your rainy day savings do not. So if you know you'll have enough cash flow to keep adding to your emergency fund in a year's time, the trade-off can be worth it.

There are other ways to set yourself up for success when times are good. With interest rates at historic lows and a gangbusters housing market, some people are taking out a home equity line of credit, or HELOC, which allows them to borrow cash as needed on a revolving basis. A HELOC is like a credit card that's secured by the equity in your home, and can be a “good backup, backup emergency fund,” Bera says, especially since your home equity — or your access to credit in general — might not be as robust when the market inevitably cools. A HELOC shouldn’t, however, replace your regular emergency savings.

All told, Bera says a three- to six-month emergency cushion is still a fine goalpost for most people. But whatever number you decide on, the bottom line is always the same: “You have to have enough cash so you can sleep at night,” she says.

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