$20,000 is ‘a good place to start’ for emergency funds, financial expert says – why a three-month buffer may no longer cut it

A general rule of thumb is that an emergency fund should cover about three to six months of living expenses. The problem is, those expenses have risen over the past few years, thanks to sticky inflation, policy shifts, tariffs and war (to name a few).

Combine that with stagnating wages, and many Americans have found that their purchasing power has noticeably decreased.

In April, inflation jumped to 3.8% — almost a three-year high — in large part due to rising energy costs. At the same time, the personal savings rate fell to 2.6% in April, according to the Bureau of Economic Analysis. While disposable personal income dropped 0.5%, spending rose 0.5%. In other words, Americans are spending more and getting less in return.

That means, even if you do have an emergency fund, it might not be enough to keep up with more challenging economic times.

While every household is different, “$20,000 is probably a good place to start for most people,” Igor Aronov, founder of FAR Financial, told MarketWatch.

Why you need to top up your emergency fund

If you’re contributing to a workplace retirement plan and investing in stocks, bonds and alternative assets, putting $20K in a high-yield savings account may seem like a missed opportunity for higher returns. Plus, you’ll lose out on the benefit of compounding.

But financial experts still recommend putting money aside in an emergency fund.

That’s because it provides a financial safety net for unexpected expenses, such as a costly car repair or medical bill, or the loss of income (such as a job loss, a reduction in hours at work or the loss of freelance gigs).

“It’s very important to have cash that you can access, with no taxes, no penalties, nothing,” Kevin Arquette, a financial planner with WealthPoint Financial Planning, told MarketWatch.

So, rather than racking up debt by charging expenses to your credit card or taking out a loan — or paying fees for taking early withdrawals from your retirement savings — you can simply borrow from your own emergency fund. Then, when you get back on your feet again, you can top it up.

The amount you need to set aside will depend on factors such as your household income and expenses. But a MarketWatch analysis of data from the Bureau of Labor Statistics estimates the monthly cost of necessities (which includes housing, transportation, groceries, healthcare, insurance and child care) at around $5,000.

So, in the event of a loss of income, a $20,000 emergency fund might only last about four months.

You may need to save even more than that, especially if your job isn’t stable or you support dependents. In that case, financial planners told MarketWatch that an emergency fund should cover six months of basic expenses — especially since it’s taking longer to find a new job in the current economy.

On average, it takes more than 11 weeks to find a new job, according to data from the Bureau of Labor Statistics. And, for 26% of unemployed people, the job hunt has lasted more than six months.

A single person doesn’t have a second income to rely on, so they should consider having at least $19,000 in an emergency fund, says MarketWatch. Married couples with children might need closer to $35,000, since their household expenses are higher.

How to build a bigger emergency fund

Whether you already have an emergency fund or you’re starting from scratch, saving $20K or more might seem like a daunting task, especially if you’re feeling the squeeze from rising costs and stagnating wages.

After all, less than half (47%) of Americans say they have sufficient liquidity to cover a $1,000 emergency expense, according to Bankrate’s Emergency Savings Report.

More than half (54%) say they’re saving less for emergency expenses because of inflation and rising prices, while 26% say it’s due to changing income or unemployment. At the same time, 68% of respondents say they’d be “very” or “somewhat” worried about covering their immediate living expenses after a loss of income.