Are you financially prepared for an emergency?
Many Americans are unprepared for an emergency like a car accident or unexpected medical cost. Traditionally, financial experts recommend having at least six-month’s worth of income saved as an emergency fund to cover costs in case of a financial emergency or job loss. However, new research reveals the new magic savings number may be lower than you think. A study of 70,000 lower-income households found that $2,467 may be the magic number when it comes to emergency savings.
Based on the research by Emily Gallagher, a financial professor at the University of Colorado and an economist at the Federal Reserve Bank of St. Louis, and Jorge Sabat, a financial professor at the Universidad Diego Portales in Chile, Americans who save at least $2,467 are best prepared for financial emergencies. Having less than $2,467 saved increases the risk but having more saved than $2,467 did not further mitigate risk. Gallagher explained, “[O]nce you have at least $2,467 stored away for a rainy day, your probability of experiencing hardship in the next six months is low and saving an additional dollar doesn’t seem to help reduce that probability very much.”
The $2,467 figure is equal to roughly one month’s salary for the households surveyed in the research. This sum does not protect consumers from all financial emergencies, but it makes a huge difference compared to the median household savings of $70 back in the post-Recession era of 2009-2011.
When it comes to saving, how you save your money matters. Standard savings accounts at brick and mortar banks typically pay a lower interest rate than high-yield savings accounts at digital banks. Many Americans fail to distinguish between investing and saving, especially when they are talking about their retirement accounts. Investing in the stock market is a way to grow your savings, but also depends on how you manage your investment.
If you have any questions about growing your savings or investing, its best to talk with a financial advisor. Whether you’re saving for a goal like the down payment on a new home or just want to grow your emergency savings, a financial advisor can help you achieve your goals and plan for the future.