Why A 6-Month Emergency Fund May Be Too Much For Many Americans


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When deciding how much to save for emergencies, a rule of thumb often recommended by financial experts is to save three to six months’ worth of living expenses —or more, depending on your needs and goals.

However, according to recent survey data, 53% of Americans don’t have an emergency fund at all. Reaching six months of living expenses in your savings is even more difficult with inflation and higher interest rates on debt.

As a financial coach, suggesting a six-month emergency fund to my students increased their feelings of hopelessness when they were already strapped for cash. Plus, a surprising number of students who had saved up more than six months living expenses were afraid to use the excess money to increase their wealth.

If you’ve already reached savings of six months of living expenses, or plan to, consider the following money tips first.

Consider If 3 Months’ Worth Of Savings Is Good Enough

The U.S. Bureau of Labor Statistics reported the average American household spends about $66,928 a year or $5,577.33 per month in 2021.

If you follow the rule of thumb of three to six months’ worth of living expenses, the range would be $16,732 to $33,464, a very large difference for many people. It’s impossible to predict all of the possible scenarios that could require using your emergency fund. And it would certainly be helpful to have more cash on hand should something catastrophic like a major home repair or a medical emergency occur.

But it’s important to ask yourself: What else could I do to create more financial stability with the thousands of dollars sitting idly?

It’s also important to consider if having too much cash saved creates complacency in your current financial or career position, versus taking a more proactive approach to grow your income.

Pay Off High-Interest Debt Instead Of Hoarding Cash

In 2021, 48% of all credit card users carried a balance at least once, based on Federal Reserve data. With the average credit card interest rate at 24.61%, keeping a high balance of cash in an emergency fund may feel more secure. But realistically those funds are deteriorating at a fast rate if you face credit card interest payments over time.

When I coached individuals, many held onto cash savings because they were following advice they received from parents and traditional financial services to save money.

They were not considering their own personal circumstances or the context in which their savings affected their debts, investments and ability to purchase property.

To help shift their habits, I teach people with credit card balances to understand and track their total net worth using tools like Mint. These tools holistically show you how high interest debt is eroding your overall wealth.

We also use a credit card interest calculator to see exactly how much of their hard-earned dollars are being allocated toward interest versus principal payments.

Integrating these two habits into your money routines will encourage you to hoard less cash and pay down your debt.

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Invest In A Top-Notch Resume and Competitive Interview Skills

One of the main reasons to have an emergency fund is security if you lose your income. As a former human resources professional, I witnessed laid off employees without a basic resume to start their job search sooner.

According to career services company Zippia, the typical corporate job opening receives 250 resumes, with four to six candidates called for an interview.

And those who had resumes, most of them were outdated and overcomplicated. People struggle to document their relevant experience and transferrable skills, even at executive levels. And as a recruiter, I found many applicants were not well prepared for competitive interviews — often rambling or unclear in their responses.

Even if you think your job is stable, one of the best tactics you can employ against an unexpected loss of income is to hire a professional resume writer and potentially a career coach.

These experts, when properly trained and vetted, can objectively improve your resume and strengthen your interviewing skills before you absolutely need to look for a new job.

While spending hundreds of dollars may feel like a lot to invest in a resume, the risk of losing your income without a competitive resume can cost thousands in your emergency savings.

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Don’t Delay Investing Into A Roth IRA

One of the common misconceptions Americans have about retirement accounts is once you contribute money, you can’t withdraw it without extra taxes or a penalty. For 2023, you can contribute up to $6,500 and an extra $1,000 if you’re at least 50 years old.

With a Roth IRA, you’ve already paid income tax on the funds you contribute. After you contribute money to it, you can withdraw original contributions at any time without paying any penalty or tax.

While in most cases you must wait until 59 1/2 years of age to withdraw any earnings without additional taxes or penalty, there are several circumstances where the IRS allows you to withdraw early and avoid the extra costs. These reasons can include disability, certain medical expenses, health insurance costs while unemployed and having a child.

Rather than keep the full six months of living expenses in a savings account that doesn’t earn much interest, you may opt to stash a portion of it into your Roth IRA where it can grow tax-free.

Now that I exceed the income limits to be eligible for a Roth IRA, I regret not having contributed more when I could.

As with all financial education, it’s important to do your own research and decide what best applies to your personal situation.

But before you let six months’ worth of cash sit on the sidelines, consider if you can deploy some of that money to secure your long-term financial health.

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Nicole Lambert
Nicole Lambert
Nicole Lamber is a news writer for LinkDaddy News. She writes about arts, entertainment, lifestyle, and home news. Nicole has been a journalist for years and loves to write about what's going on in the world.

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