There’s a New Rule for Your Emergency Fund — Does it Apply to You?

An emergency fund is a financial safety net that helps you afford unexpected expenses. Most experts say you should be safe saving three to six months of living expenses in this fund.

Representing thousands in “uh oh” money, the three-to-six rule is a longstanding standard in the personal financial world. But a recent study throws it all into question, suggesting that low-income families need considerably less to be protected. That’s good news if saving three months of expenses poses a challenge for your financial abilities today.

What is the New Rule of Emergency Funds?

Forget about three to six months of living expenses. You may only need to save up a minimum of one month’s worth of living expenses in your fund.

That’s according to a 2019 study from the University of Colorado, in partnership with the Department of Finance and Federal Reserve Banks. They crunched the numbers on several economic reports to determine that the average low-income family needs far less to handle most unexpected expenses, including household repairs and medical expenses.

For the average low-income family, a one-month emergency fund translates to just $2,467. While this may still be a lot of money on a tight budget, it’s far less than the $7,4012 to $14,802 you would need to satisfy the original three-to-six rule.

What if You Don’t Have One Month of Savings?

By the numbers, this modified goal should be easier to achieve than the original advice. But practically speaking, reality can deviate from the black and white of studies and statistics.

You know that real life doesn’t always follow “the” plan. Your car brake lights go, you need an emergency dental crown, or you forget about a pesky annual subscription. These expenses steal money away from your budget, leaving you unprepared. Maybe you can’t afford to set aside any savings if you expect to pay your bills, or you haven’t yet paid back your emergency fund since the last time you used it.

In either case, you can’t rely on savings to help when the unexpected makes its appearance. So, what can you do? You can consider emergency loans as a temporary backup. Emergency loans are convenient safety nets, filling in for insufficient savings until you get back on your feet.

To get started, ask questions like what is an emergency loan and how can I apply for one. You can easily find need-to-know information with a quick and convenient online search, comparing how different lenders answer these questions. You can apply for the one that provides the most favorable terms under the timeline you need.

If approved, you may use an emergency loan or line of credit to bridge the gap. It gives you the financial power to cover the unexpected without worrying about your other usual important bills.

Is One Month Enough for You?

This is a personal finance article, with an emphasis on personal. Of course, no rule will perfectly apply to every single person and their unique situation. You might run into more unexpected expenses consecutively than the average person, or a single emergency expense may be more expensive than several combined.

The one-month “rule” only provides a general guideline to help you understand your options. If a three-to-six-month emergency fund is too big to achieve today, focus on how you can save just one month. You can figure out how you can grow your savings later when you have the financial flexibility.