How Much Should I Have In My Emergency Fund If I Live Paycheck to Paycheck? Two Experts Weigh In

Most people believe that one should have at least three to six months of living expenses saved up as an emergency fund. However, two experts argue that this approach may not be feasible in the current economic climate.

Emergency funds are not just extra, expendable money in one's bank account. This is a carefully planned and saved amount that one only gets to use for specific purposes or emergencies. This stash is a safety net for life's disruptions and helps cover unexpected medical bills or job loss. The ideal emergency fund amount, however, remains a subject of debate.

In the wake of the global pandemic, which caused tens of millions of Americans to lose their jobs, some financial experts are advocating for a more tailored approach. "In some cases, we need to throw conventional wisdom out the window," Lynnette Khalfani-Cox, The Money Coach and author of Zero Debt: The Ultimate Guide to Financial Freedom, tells CNBC Select.

"To the extent that some people are still saying you need three to six months, I feel like that's not taking the temperature in the room correctly."

How Much To Save According To A Personal Finance Expert

While Khalafani-Cox acknowledges the time-tested advice of saving three to six months' living expenses for emergencies, the financial expert highlights a concerning reality: Almost half of Americans struggled to afford $400 emergency expenses even before the pandemic.

In light of the staggering unemployment numbers exceeding 40 million and the long-term effects of the pandemic, Khalfani-Cox argued that the traditional three-to-six-month emergency fund recommendation isn't practical advice.

"It is unrealistic and almost deceiving to tell people who are trying to get by, who are living paycheck-to-paycheck or living on unemployment... it's wholly unrealistic to start talking to them about having six months of savings," she says.

However, the specific amount you should save depends on your income level and personal comfort level with financial vulnerability. For example, if you earn 25 percent less than your pre-pandemic salary, aim to save 25 percent less towards your emergency fund.

It's a great start, even if you can only allocate $25 per paycheck. "Everybody, individually, needs to look at the facts and figures of their lives given where they are," Khalfani-Cox continues.

How Much to Save According to an Economist

Economist Emily Gallagher, an assistant professor of finance at the University of Colorado Boulder, whose co-authored 2019 report, "Rules of Thumb in Household Savings Decisions," that recommended saving at least $2,467, said her previous advice doesn't suffice for the current economic climate.

Analysing data from 2010 to 2012, Gallagher identified a target emergency fund of $2,467 (equivalent to roughly one month's income) for American households earning less than 200 percent of the poverty line (approximately 30 percent of the working U.S. population). This translates to families of four with an annual income of $30,000 or less.

Compared to saving six months of living expenses, a $2,467 emergency fund is a more achievable and realistic goal for low-income savers who typically save a few hundred dollars monthly. Gallagher believes this amount can serve as a buffer against hardship and minimise the risk of missing rent, bills, or medical care payments in the future.

Notably, $2,467 is a promising and potentially achievable savings target. However, the ideal amount for today's economy remains to be determined. "That savings target depends on how the government responds to this crisis," Gallagher says. "That response (and, in turn, the appropriate savings target to weather this crisis) is anybody's bet."

The government's stimulus checks and enhanced unemployment benefits can be opportunities to save. Even if you're unemployed but have enough to cover essentials, consider saving a portion of the extra $600 per week in unemployment compensation.

Many Americans have already used their $1,200 stimulus checks. If additional relief measures are passed in the future, plan to save any funds you receive. While saving is necessary, building wealth requires moving beyond it, as self-made millionaires Barbara Corcoran and Grant Cardone advocate. Investing in assets that produce income is key for long-term financial growth.

This is especially crucial for retirement, as a recent Pew Research Center report highlights. Nearly one in five Americans over 65 are forced to consider returning to work after exhausting their savings, underscoring the importance of calculating how much you need to save in advance.