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A lot of people may be ill-equipped to get through a period of unemployment.
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There’s a reason every consumer, regardless of income, should have an emergency fund. Without money in the bank, you might struggle if you lose your job and the paycheck that goes with it.
In fact, as a general rule, you should aim to have enough money in your savings account to cover at least three full months of essential bills. These include things like your mortgage payment or rent, food, and utilities.
The logic here is that if you lose your job — especially during an economic downturn — it might easily take you three months or longer to find work again. So you’ll want a way to cover your bills without falling behind or having to rely on credit cards or loans.
But according to recent data from YouGov, more than half of Americans have less than $5,000 in savings. And that means many people are not, in fact, equipped to cover three months of essential expenses.
Don’t leave yourself short
Even if you have a great career and a steady job, you never know when economic conditions might worsen. And if that were to happen, your risk of getting laid off could increase.
That’s why having an emergency fund with enough cash to cover three months of bills is crucial. But unless you live very frugally, it will probably take more than $5,000 to reach that threshold.
A 2022 research report by The Ascent found that the average American household spends $5,577 a month on living expenses. So if you have less than $5,000 in the bank, it means you may not have enough money on hand to pay for even a month of bills.
Now to be fair, when we break down that $5,577, we see that it doesn’t just include essential expenses. It also accounts for things like entertainment, which the typical consumer spends almost $300 on each month.
But even if we only account for the top five essential spending categories among U.S. households — housing, transportation, food, insurance, and healthcare — we see that the typical household spends about $4,600 on those key items alone. So either way, it’s fair to assume that having under $5,000 in savings means the typical consumer can’t cover three months of essential bills.
Prioritize your savings
Having some amount of money in savings is certainly better than having none at all. And to be clear, if you have, say, $3,000 in the bank, that’s certainly something to be proud of.
At the same time, it’s important to figure out how much money you spend on essentials each month and then work your hardest to sock away enough cash to cover that sum three times over. Perhaps you spend less than the typical American, so run your own numbers to establish your personal savings goal. And from there, do what you can to make building savings a priority.
You may need to cut back on leisure spending for a while to make faster progress on your savings. You may even need to make sacrifices like getting a roommate or not going on vacation. But if you land in a scenario where your job goes away and you need a financial lifeline, you’ll be thankful for having built one.
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