I’m often asked (and I often ask myself), “How much savings do I need to have?” For such a short question, you’d think there might be a short answer. No way – the answer is long, complicated, and unclear. Each person or family has very different savings needs, depending on the situation in their life. One constant, however, is that cash reserves for short-term needs are important to maintaining your long-term financial health.
Let’s start by talking about what type of savings we’re talking about here. For purposes of this article, I am talking about the money that would keep you from going into debt if there were an emergency, or the money that would have to tide you over until if your income were to be interrupted. Ideally, this money is kept somewhere separate from your regular money and is relatively accessible. (A few days to close out a CD is fine, tied up in a retirement account is not fine.)
The question of how much savings is very individual. First, you need to know roughly how much money you need to get through a month. Not how much you are currently spending, but how much you would spend if you slashed all unnecessary expenses. Second, you need to consider the consistency of your paycheck. If you are on active duty, then it seems that your paycheck should be pretty consistent, but there are far too many times when things go wrong, like when my friend PCSed and the Army decided that he had ETSed. Third, think about your level of preparedness for things that are expected but you haven’t made financial arrangements to handle, like your car needing new tires. (Can anyone really say that they were surprised that their car needed new tires? Probably not, but few of us keep a separate new tire savings account.) Fourth, consider what sort of actual surprises life might throw at you, like a house fire or a medical emergency or whatever other issues you can imagine.
If you’ve really thought about it, you have probably figured that there is no such thing as a single amount of emergency money that can be enough. However, you’ve got to estimate somewhere. The old conventional wisdom was 3-6 months of living expenses, but with the difficulty in finding jobs and general uncertainty of the economy, most experts are now saying 6-12 months of expenses. If you are on active duty, and you have a reasonable expectation of remaining on active duty for the next 3-5 years, then 3-6 months is probably plenty for you. If you forsee changes in your future, such as leaving the military, I would definitely encourage you to save more.
Where In The Heck Am I Going To Get That Money?
Don’t panic. No one builds an emergency fund overnight. Heck, it has taken my husband and I nearly 20 years to get to the point where I feel we are prepared for whatever life might throw at us. When we were first married, we were broke. At one point, our emergency fund was a check on the fridge, from my in-laws, that we could cash if we got stuck. Not everyone is that lucky, and we never had to cash it, but I was thankful for the security.
Start with the usual things, like making a list of your income and bills, then figure out how to siphon off a few dollars here and there. Set up a separate account, and set up an automatic transfer to that account. If you tend to dip into your savings, make it hard to get to the money. I’ve often had little savings accounts at other banks for specifically this purpose. Figure out how to put money into that account. I’ve tried a couple of different strategies over the years. I’ve put used my paychecks for savings, I’ve done $5 or $10 per pay period, I’ve put any “extra” money aside. Regardless, figure out something. Then increase a bit at a time. As you know, I am a huge proponent of living off just one income. Use a second, or third, income to pay off debt, do fun stuff, and increase your emergency fund.
It isn’t actually so important how you fund it, or how much goes in at one time. What is super important is that you don’t use it for day-to-day stuff, and that you keep contributing. Eventually, you will discover that you have a surprising pile of money stashed away.
The summary? There is never enough, you’ve just got to start now and keep sticking to it. One day, you will discover that you’ve built up a nice emergency fund and you are ready for anything!