Emergency savings are a critical component of financial wellness. Our research finds that even minor emergencies can cause major financial hardship like bankruptcy, the accumulation of overwhelming credit card debt, or the early withdrawal of retirement funds.
But how much do you need to save for emergencies? Common estimates range from a few months to almost a year of take-home income – but there seems to be little or no science behind many of these recommendations. To address this gap, HelloWallet Savings & Debt Guidance includes an Emergency Savings Calculator that determines personalized emergency savings levels tailored to your specific situation.
These personalized emergency savings levels are based on our analysis of anonymous HelloWallet member data to more accurately provide the amount of savings needed to face different kinds of emergencies. Through these data we have observed spending on different types of emergencies, variations in spending, changes from normal spending, and spending on repairs such as payments to a roofing company or auto repair shop.
We recommend savings levels for three different types of emergencies:
For minor emergencies, we recommend keeping enough money on hand to be able to pay for most of the car and home repairs we observe in our data, as well as to be able to meet health deductibles.
For major emergencies, we recommend saving enough to cover one of the following: an unusual, but high-cost, car or home repair, or your maximum out-of-pocket healthcare costs.
To protect against job loss, we recommend being able to cover your expenses for a year, taking other sources of income into account, such as unemployment insurance and spousal wages. In certain cases, we will suggest that you don’t need to set aside any savings for job loss if a secondary income (i.e. your partner’s income) or unemployment benefits cover your yearly expenses.
Using our recommendations, you can better understand the costs of different kinds of emergencies and assess your ability to cope with these emergencies. Of course, you may have different risk preferences and incentives in terms of how much you want to prioritize building your emergency savings, and for which emergencies you wish to prepare. You can override our recommendations and set your own target emergency savings levels at any time. You may also go back through the calculator and edit your inputs to receive updated recommendations.
Note: The above Emergency Savings Methodology is an evolution of our existing methodology used to calculate your Financial Wellness Score. We will be incorporating the above improvements into the Financial Wellness Score in the near future.