Financial Nest Egg—Are You Saving Enough for a Stormy Day?

December 2014/January 2015 View more

Woman Calculating Budget With Savings Jar In ForegroundHow prepared are Americans to pay a large unexpected expense or to temporarily live without a paycheck without it cracking their nest egg? A poll by financial research firm last February revealed an eye-opening statistic – just 51 percent of the U.S. population had more in contingency savings than in credit card debt, the lowest since launched its survey in 2011. Of those polled, 28 percent owed more on their cards than they had in savings, and another 17 percent said they had no credit card debt, but no emergency fund either.

How Much is Enough?

Opinions vary on how many months of reserve you should have on hand. Some experts recommend three months, others six, others eight months to a year. “Emergency funds are no longer the same for everyone,” says Bill Lymangood, executive director at Morgan Stanley in Naperville. “For example, if you are single, six to eight months of living expenses on reserve to give you time to find a new career would be a good rule of thumb. If you are married with both spouses working, four to six months might be sufficient if one spouse becomes unemployed.”

Suze Orman, personal finance expert says that if you live on 50 percent of what you make and save the rest, you should have no problem if life’s little bumps occur. No sweat, right? Orman recommends keeping at least eight months in emergency savings in reserve.

Saving Over Time

More realistically, you may have to start small, with $1,000 for a rainy day, and then build on those funds each and every month. If you now have funds from your paycheck funneling straight into your 401K, you realize how painless direct deposit can be. You can treat your emergency contribution, too, as a monthly bill and deposit it straight from your paycheck.

Building An Emergency Fund

Whether it’s to fund expenses during unemployment, or to have cash on hand for a pricey home repair or personal crisis, emergency funds are a vital part of any financial plan, and there are several helpful suggestions to build one that is funded adequately. Lymangood says you need to first carefully determine what your monthly expenses are and where you could cut if you needed – cable TV, dining out, clothes shopping, entertainment, etc. Then multiply trimmed expenses by the number of months you realistically think you could be out of work.

Your fund, however small, should be a segregated pot of money, not part of savings earmarked for an upcoming vacation or your child’s college education. As much as possible, it should be a cash fund, so as not to exacerbate an already tough situation by maxing out your credit cards.  Interest charged for credit card accounts is usually way too high to be used as an effective emergency fund. Experts strongly discourage dipping into your 401k – with penalties – as an alternative.

Some experts suggest that you put your emergency savings in a different bank than your everyday checking/savings account, so you’re less tempted to sneak funds out. Even better, a money market fund – even though it’s yielding marginal returns – offers easy convertibility to cash.

If push comes to shove you might want to check with your broker regarding your Roth IRA. But before withdrawing anything for emergencies, check to see if you can withdraw your contributions (not your earnings) without penalty, taxes or fees. Also make sure that once the emergency subsides, you can still contribute the money you withdrew back into your Roth IRA.

Finally, if you are ready for a shock, complete an Emergency fund spreadsheet at, to see what the spreadsheet suggests you should have on hand for a rainy day fund.