The 3-6-9 Guideline for Emergency Savings
The 3-6-9 Guideline for Emergency Savings
By Julia Chang
We know it’s a message you’ve heard many times before, but it’s worth repeating: Maintaining an emergency savings fund is one of the pillars of a healthy money life.
Why? Think of it like the fire extinguisher you keep in your house; ideally, you’ll never need to use it—but when you actually have to, you’re so glad it’s there.
The same goes with an emergency fund. Sure, you could use that money on a weekend beach getaway. But when the basement floods during a freak rainstorm, that rainy day fund can become a financial life saver.
The one thing that might, however, feel stressful about building an emergency fund is feeling like yours is never sufficiently stocked. How can you really be sure you have enough? There’s no one-size-fits-all answer to that—but there are some rules we at LearnVest think you should consider to help you feel less worried and more confident that you’re maintaining a cushion commensurate with your lifestyle and household responsibilities.
If You Don’t Have Emergency Savings at All
Before we get started, however, first things first: If your answer to “How much is in your emergency fund?” is “What emergency fund?” then we recommend getting started, stat. Consider saving whatever amount you can now—whether it’s $100, $50, or even $25 a month—until you have at least one month of take-home pay stashed away.
This should happen before you accelerate any other financial goals, like paying more than the minimum owed on your credit cards, fast-tracking your student loan repayment or saving for the down payment on your future dream home. Why?
Because if a financial emergency strikes, having even a small cushion could help lessen the chances that you’ll turn to your credit card—and add to debt you may be diligently trying to pay off.
Got at least a month of take-home pay in your emergency savings account? Good. Now you can focus on growing it even further (while tackling other goals, too). Here are some benchmarks that can help you determine if you’re making good progress—or if you need to be more prepared for that rainy day.
When 3 Months of Take-Home Pay May Be Enough
Are you a proud renter, have only your mouth to feed, have a steady paycheck and could always move back into your childhood bedroom if necessary? Then having three months’ worth of take-home pay in an emergency fund may be sufficient.
Essentially, not bearing the responsibility of a mortgage or minor children makes having an emergency fund of more than three months a nice thing to have—but not necessarily a must-have. Another big factor that weighs into this is whether you have a reliable “safety net:” i.e., relatives or close friends who would gladly take you in or help you out if you were really in dire straits.
If all this describes your situation, once you hit the three-month mark, you can feel comfortable directing more of the money you would be putting into emergency savings toward your other big financial goals, like paying down debt or saving more for retirement.
When 6 Months of Take-Home Pay May Be Enough
This is the emergency-fund rule you may have heard most often and, indeed, it is the one that is likely to apply to the largest group of people.
Married with kids, own your home in the ‘burbs and have two steady paychecks coming in? Consider building up to an emergency fund equivalent to six months of the take-home pay of the highest earner in your household.
Married with no kids but still have a mortgage to pay? The same guideline applies. Married single-income renters with a toddler? Ditto. Single with a condo? We think you know the answer.
Basically, if you own your home or have kids under the age of 18 or have no aforementioned safety net to speak of (or any combination of these factors), six months is a good benchmark to aim for. When in doubt, think six.
When 9 Months of Take-Home Pay May Be Needed
OK—now that we’ve got the number six etched in your brain, there are some instances when you may need more than that in your emergency fund—and that largely has to do with whether or not you’ve got a steady paycheck.
If you (or your spouse) are self-employed or are a full-time freelancer, chances are higher that your income is less predictable. One month, you could be juggling 10 deadlines and working 60-hour workweeks. The next month could be spent waiting around for business to come through—and let’s not even get started on the fact that your clients may be a bit pokey when it comes to cutting checks for you.
In a nutshell, the more unpredictable your income, the more you could find yourself thrown off by a chipped tooth or fender bender. So having an emergency fund padded with nine months of the highest earner’s net income may help give you a bit more peace of mind that you could weather a financial storm. (Just note that how much you’re socking away each month toward emergency savings should be looked at holistically, within the context of your big-picture money goals—a decision you may want to make with the help of a financial planner, no matter your situation.)
It bears repeating that the 3-6-9 guideline is merely that—a guideline to help you assess whether the size of your emergency fund can help you sleep a little better at night. We do, however, encourage you to try to meet the benchmark that most closely applies to your situation—because when it comes to an emergency fund, less really isn’t more.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company.