Many Americans now need $20,000 in an emergency savings fund. Yes, really.

By Venessa Wong

The old rules of thumb are broken - here is why a three-month cash buffer is 'almost dangerous'

"Any path that you're going to take to financial independence or take to build wealth, it's going to start there," financial planner Kevin Arquette told MarketWatch.

After years of rising costs, having adequate emergency savings now means amassing a cash buffer of $20,000 or more for many households, according to a MarketWatch analysis of spending data broken out by age and household type.

The typical financial rule of thumb is to have three to six months of basic living expenses in a high-yield savings account to soften the blow of unexpected emergencies - such as job loss, a large medical bill or home repair - to avoid taking on high-interest debt. According to MarketWatch estimates using spending data from the Bureau of Labor Statistics, the average monthly cost of necessities - groceries, housing, transportation, child care or elder care, healthcare and insurance - is approaching $5,000 in the U.S.

In today's economy, "$20,000 is probably a good place to start for most people" when determining how much emergency savings their household needs, Igor Aronov, a financial planner and founder of FAR Financial, told MarketWatch.

This is just an average benchmark, and every household needs to account for their unique expenses, job security and other circumstances. But "the bottom line is $20,000 now is not what it was two years ago," Eustache Clerveaux, a financial planner at Fidare Wealth Solutions, told MarketWatch.

In reality, the median American household only held $8,000 total in transaction accounts (which includes checking, savings and money-market accounts) in 2022, according to data from the Federal Reserve. Adjusted for inflation, that is roughly $9,200 today.

Meanwhile, the personal saving rate, or the share of people's incomes left after they pay taxes and spend money, declined to 2.6% last month, down from 5.5% a year ago.

Having five figures sitting in a high-yield savings account may seem like a loss compared to investing that money, especially for young people who have decades for their investments to compound. Still, "It's very important to have cash that you can access, with no taxes, no penalties, nothing," especially as you take on more financial responsibility such as having children or buying a home, Kevin Arquette, a financial planner at WealthPoint Financial Planning, told MarketWatch. "Any path that you're going to take to financial independence or take to build wealth, it's going to start there."

Many planners suggest people only contribute enough into a workplace retirement account to get the full employer match until their emergency fund is fulfilled. At that point, they can bump up their investing rate.

"Nowadays, I feel like three months is better than nothing, but I think the target should be higher than that."Igor Aronov, a financial planner and founder of FAR Financial

For many workers - such as single-earners, people whose jobs are not stable or those who support dependents - the standard emergency fund should cover six months of basic expenses, financial planners told MarketWatch. This, "generally speaking, provides a comfortable buffer," said Chad Lange, a financial planner at Donaldson Capital Management. The average length of unemployment has been lingering near six months.

In many cases, the experts said, people should consider a three-month fund to be the "bare minimum," and mainly suitable for those with stable jobs, no dependents, or whose spouse's income could nearly cover all basic monthly expenses if they lost their job. "Nowadays, I feel like three months is better than nothing, but I think the target should be higher than that," said Aronov.

For workers who would have a hard time quickly finding a new job that pays as much as their old one if they were laid off - especially if they are their household's bigger earner and they support dependents - a three-month emergency fund is "almost dangerous, with prices going up and everything changing so fast," Aronov added.

The U.S. inflation rate jumped to a nearly three-year high of 3.8% in April due to rising energy costs.

Household expenses vary greatly by size, and the amount of emergency reserves needed may look different, depending on how many incomes there are, how secure their jobs are and whether there are dependents.

For instance, the average cost of basic necessities for a married couple with kids, about one-fifth of U.S. households, is now more than $5,800 per month. That translates to $17,500 for a three-month emergency fund if both parents have stable jobs or could easily cover costs on just one of their incomes.

Meanwhile, a single person's average monthly cost for necessities is a much lower $3,200, but they may benefit from having a six-month emergency fund, as they do not have a second income to rely on, Lange said. A six-month emergency fund for these households would be close to $19,000, on average.

Married couples with children typically require the largest reserves if both parents have less stable jobs or if there is only one working parent. Based on average necessary expenses of $5,800, a six-month fund of $35,000 could provide a better safety net.

Retirees, meanwhile, may handle emergency savings differently, as they are no longer relying on a job for income. Rather than job loss, their biggest financial shocks are often health-related, housing-related and family-related expenses, MarketWatch previously reported.

Many planners recommend retirees to keep at least 12 months of living expenses in cash - minus any predictable income they will receive, such as Social Security or pension payments - to protect against having to sell assets during a potential downturn.. They can add reserves to that total for unexpected emergencies. Average unexpected expenses are about $6,000 per year, according to a recent study by the Center for Retirement Research at Boston College.

You don't want to keep huge sums in cash "sitting idly without any purpose, without any meaning," Aronov said, but protecting your finances from emergencies is far from meaningless "from the perspective of sleeping at night."

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-Venessa Wong

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06-02-26 1334ET