$2,500 Is Your New Emergency Savings Goal

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If saving up three to six months of expenses in an emergency fund feels like advice that’s wise but nearly impossible to achieve, there’s growing evidence that you don’t need quite that much money stashed away to cushion you from financial emergencies. $2,500 may be enough to get you started.

The latest is a study by Jorge Sabat and Emily A. Gallagher, featured recently by CNBC Make It. They found that for low-income households, the key amount of savings is $2,467. That comes out to about one month’s earnings for the average low-income household.

Sabat and Gallagher make it clear that this shouldn’t be the end goal for emergency savings, but a minimum.

Why starting is the most important savings step

As we’ve mentioned before, the most important part of saving for emergencies is having anything — really, any amount over zero — on hand to improve your ability to bounce back after a financial blow.

An Urban Institute study found that families who even have as little as $250 stashed away are less likely to be evicted or miss bills when their employment is disrupted. That same study also found that low-income families with savings between $2,000 and $5,000 were less likely to experience financial hardship after an income disruption like a job loss than were middle-income families with nothing saved.

So that’s two instances of $2,500+ in emergency savings getting you to the “cooking with gas” level of financial security.

Two grand may not be enough to float you for a prolonged period of unemployment, but it can help you through a brief financial shock. And even if that amount still seems large, there’s a reason it’s a good one to keep in mind for a minimum viable emergency fund: it’s actually more achievable than you think.

Once you start, you have saving momentum

Gallagher explained to CNBC that the goal-gradient hypothesis can help you build your savings. It’s the idea that you want to work harder to achieve a goal the closer you get to it.

Think of watching a race, where the runners give their all to sprint for the finish line no matter how many laps they’ve already done around the track. That final burst of energy, as a post at Farnam Street explains, comes into play for more than just athletes. As you see your own finish line — in this case, a financial security threshold — get closer, you want to do more to contribute to your little safety net that you built all by yourself.

Once you hit the finish line, you don’t turn around and take another lap at a full sprint. You rest, recuperate, and then say “Yeah, I could run it again.” But this time, you might decide to go a little faster, or a little farther.

By setting a small goal, you increase the chance of achieving it. But by setting a slightly larger goal, you really stretch yourself to get there, without making it so hard that it’s impossible to do. $250 is a great start for an emergency fund. But could you save $500? How about $1,000?

Once you start rolling, $2,500 may not feel so impossible. And when you get there, who’s to stop you from saving more?


Comments

    Interestingly (and annoyingly) our social security penalises people with savings. Lose your job and you'd expect to get some benefits while you try to find another one. Unfortunately if you go in to Centrelink they'll ask how much you have saved up and you won't be eligible for benefits until that money is run down.

    Don't get me wrong, it's great to have savings, but it shouldn't be so hard to get assistance from the Government during hardship.

    On a different note, assuming you have a decent super fund you can also dip into that in times of hardship. So if you run out of savings and you're stuck waiting on Centrelink it is possible to get some assistance from your super fund. Assuming things work out, once you're back on your feet you can top the super up with voluntary payments.

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