Money experts generally encourage you to set aside three to six months’ worth of living expenses in an emergency fund, and many Americans struggle to do even that: The median American household has only $11,700 across all of its savings and retirement accounts. Still, self-made millionaire and bestselling author David Bach says that’s not enough.
He wants you to fill an emergency account with enough to cover a year’s worth of living expenses.
“Here’s the thing with emergency money: More is always better,” Bach tells CNBC Make It. “You hear all the time experts say, you should have three months of expenses set side. Well, it depends. In the recession, when people lost their jobs, three months of expenses set aside wasn’t enough.”
Suze Orman agrees that a few months’ worth of expenses isn’t enough to feel secure. “You should have at least eight months,” says the financial expert. “Not six months, not three months. I’d like to see you have eight months to one year.”
Life, after all, doesn’t usually go as planned. There could be another recession, you could lose your job, have a medical emergency or have to deal with a car breaking down.
That’s why “I’m a big encourager of having a year’s worth of expenses set aside,” says Bach, who personally keep two years’ worth set aside in a money market account “because I’m conservative.”
You don’t have to save that much right away, Bach adds: “I know that’s a large number.” But if you start consistently saving a small percentage of your paycheck, you can build a substantial safety net over time.
“The best way to fund your emergency account is always the best way to save money for anything, and that’s to save money automatically,” he says. “When your paycheck gets deposited, move money automatically from your checking account into a separate money market account or a separate savings account that you won’t touch. … You literally want to almost forget it’s there.”
That way, you’ll be less inclined to dip into your savings for a night out, a vacation or a new iPhone.
In short, when it comes to your emergency fund, “more is better,” says Bach. “At least get three months, then get to six, then go to nine. A year is fantastic.”