T. Rowe Price Personal Investor - Emergency Fund Planning: How Much Cash Should I Have on Hand? (2024)

personal finance | march 20, 2024

Having accessible cash for financial emergencies or general spending can help keep your financial goals on track and offer some peace of mind.

Key Insights

  • An emergency fund can serve as your personal safety net during periods of financial stress.

  • While you’re working, we recommend you set aside at least $1,000 for emergencies to start and then build up to an amount that can cover three to six months of expenses.

  • When you’ve retired, consider a cash reserve that might help cover one to two years of spending needs.

The events over the last few years certainly illustrate how life can throw you a curveball. At the same time, stock market volatility continues to be a concern for investors. These circ*mstances can throw a wrench into your current budget and make you anxious about the longevity of your retirement savings.

For years, financial experts have stressed the importance of an emergency fund for such events during an individual’s working years. When you retire, however, those savings are more of a “cash cushion” to have alongside what you need to fund your daily living expenses.

Whether you are currently working or in retirement, having cash on the side can serve as your personal safety net during periods of financial stress.

Automate your savings with ease.

Effortlessly save for retirement or a rainy day with automatic transfers to your account. It’s easy with our Automatic Buy feature.

Learn More About Automatic Buy

Automate your savings with ease.

Effortlessly save for retirement or a rainy day with automatic transfers to your account. It’s easy with our Automatic Buy feature.

Learn More About Automatic Buy
personal finance 4 Reasons to Save in a Money Market Fund Saving in a money market fund could be beneficial for your short-term financial goals.

If you are still working:

The primary purpose of an emergency fund is to keep your financial and savings goals on track should you lose your job or expect a change in income for a brief time. It can also help cover large, unanticipated expenses that you may not have included in your budget. Having this money handy can save you from putting unexpected expenses on a credit card or taking money out of retirement accounts—and likely paying taxes and penalties as a result.

For starters, try to save $1,000 immediately for emergencies. Then, gradually build up to an amount that can cover three to six months of expenses if you are in a two-income household. If you only have one income, or your income is less predictable—such as with freelance or commission-based work—you may want to set aside enough for six months or more.

After you tapinto this account for an emergency, make sure you start building it up again.

If you are retired:

Retirees may view their need for available cash differently. They think of this as money separate from the savings and checking accounts used for daily and regular spending. It’s more like a cash cushion than an emergency fund. One of my friends refers to this as his “sleep at night money.”

The cash cushion can be in a savings account or money market account or in other short-term investments such as short-term bond funds, short-term certificates of deposit, or tax-free short-term funds. The latter makes sense if you are in a higher tax bracket. Keep in mind that, unlike bank products, investments in mutual funds are not FDIC-insured and are subject to the loss of principal.

This money can be used as an alternative to fund living expenses if there is an extended down market. You can draw from this account instead of having to sell investments at an inopportune time and locking in a loss.Consider these two bear markets—the technology bubble crash in 2002 and the global financial crisis in 2009 that lasted 2½ and 1½ years, respectively. Both recovery periods took almost five years.


Subscribe to T.Rowe Price Insights

Receive monthly retirement guidance, financial planning tips, and market updates straight to your inbox.


Subscribe to T.Rowe Price Insights

Receive monthly retirement guidance, financial planning tips, and market updates straight to your inbox.

While a five-year recovery may seem alarming, keep in mind that many retirees do not have all their investments in the stock market. At retirement, we suggest taking a more balanced approach in your portfolio allocation, with 45% to 65% in stocks. A hypothetical portfolio that was composed of 60% stocks and 40% bonds during the last two bear markets recovered within two years.* Of course, past performance is not a reliable indicator of future performance.

Given this backdrop, it may be reasonable that a contingent cash account, or “cushion,” should cover one to two years of living expenses in addition to accounts used for regular spending.

For both workers and retirees, a financial shock or a declining market environment can be emotional and cause anxiety. Having cash on the side—outside of your retirement accounts—can help you maintain control and weather these periods of uncertainty.

Having cash on the side—outside of your retirement accounts—can help you maintain control and weather these periods of uncertainty.

Having cash on the side—outside of your retirement accounts—can help you maintain control and weather these periods of uncertainty.

Unlike bank products, investment products are not FDIC-insured, not bank guaranteed, and may lose value.

*Stocks are represented by the S&P 500 Index. Bonds are represented by the Bloomberg U.S. Aggregate Bond Index. The evaluation periods for stocks from peak to trough to recovery were 3/00–5/07 and 10/07–3/13. The evaluation periods for a 60% stock/40% bond portfolio from peak to trough to recovery were 3/00–11/03 and 10/07–12/10.

Important Information

All investments are subject to market risk, including the possible loss of principal.

This material is provided for general and educational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and is not intended to suggest that any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.

© 2024 T.RowePrice. All Rights Reserved. T.RowePrice Investment Services, Inc., distributor, T.RowePrice mutual funds and T.RowePrice ETFs.

View investment professional background on FINRA's BrokerCheck.

202403-3458457

Next Steps

  • Explore our broad range of investment products and solutions.

  • Contact a Financial Consultant at 1-800-401-1819.

Download a prospectus | Log in to your account

personal finance 4 Reasons to Save in a Money Market Fund Saving in a money market fund could be beneficial for your short-term financial goals.
T. Rowe Price Personal Investor - Emergency Fund Planning: How Much Cash Should I Have on Hand? (2024)

FAQs

T. Rowe Price Personal Investor - Emergency Fund Planning: How Much Cash Should I Have on Hand? ›

While you're working, we recommend you set aside at least $1,000 for emergencies to start and then build up to an amount that can cover three to six months of expenses.

How much cash should I have in my emergency fund? ›

How much should you save? While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.

How much cash should an investor have on hand? ›

Verhaalen often recommends clients maintain a cash reserve that's, at a minimum, the equivalent of six months of income.

How much cash should I have on hand in retirement? ›

Generally, you want to keep a year or two's worth of expenses in cash when you're retired. Your investments will probably fluctuate over time. If you left all your savings invested until you needed the money, you'd run the risk of withdrawing your funds when your portfolio was down.

How much should a retiree have in an emergency fund? ›

How much should retirees set aside for emergencies? The general rule of thumb is to save three to six months of living expenses as an emergency fund. However, for retirees, I'd recommend having closer to one to two years of cash free from investments, annuities, and CDs.

Is $20000 too much for an emergency fund? ›

A $20,000 emergency fund might cover close to three months of bills, but you might come up a little short. On the other hand, let's imagine your personal spending on essentials amounts to half of that amount each month, or $3,500. In that case, you're in excellent shape with a $20,000 emergency fund.

Should I keep emergency fund in cash? ›

Where should you keep your emergency fund? Experts recommend keeping your emergency fund in an account that's liquid and easily accessible. It should be completely separate from your primary checking account so you aren't tempted to use it in a non-emergency.

How much cash should I keep in my investment portfolio? ›

The cash you keep for your portfolio goes well beyond your emergency cash and retirement funds. Most financial experts will agree that you need to have at least six months of expenses set aside to hold you over in case of an emergency or change in your career.

How much money do I need to invest to make $1000 a month? ›

A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.

How much of net worth should be in house at age 65? ›

The rule of thumb: A common rule of thumb for real estate allocation is to invest no more than 25% to 40% of your net worth in real estate, including your home.

How much cash should a 70 year old have? ›

How Much Should a 70-Year-Old Have in Savings? Financial experts generally recommend saving anywhere from $1 million to $2 million for retirement. If you consider an average retirement savings of $426,000 for those in the 65 to 74-year-old range, the numbers obviously don't match up.

How much cash should a 60 year old have in their portfolio? ›

At age 60–69, consider a moderate portfolio (60% stock, 35% bonds, 5% cash/cash investments); 70–79, moderately conservative (40% stock, 50% bonds, 10% cash/cash investments); 80 and above, conservative (20% stock, 50% bonds, 30% cash/cash investments).

How much does the average 66 year old have in savings? ›

The above chart shows that U.S. residents 35 and under have an average of $30,170 in retirement savings; those 35 to 44 have an average $131,950; those 45 to 54 have an average $254,720; those 55 to 64 have an average $408,420; those 65 to 74 have an average $426,070; and those over 70 have an average $357,920.

How much emergency fund does Suze Orman recommend? ›

While the typical framework for an emergency fund is to set aside between three to six months' worth of savings, Orman recommends saving eight to 12 months of essential expenses in an emergency fund for known expenses.

Is $10,000 too much for an emergency fund? ›

Those include things like rent or mortgage payments, utilities, healthcare expenses, and food. If your monthly essentials come to $2,500 a month, and you're comfortable with a four-month emergency fund, then you should be set with a $10,000 savings account balance.

Is $100 K too much for an emergency fund? ›

It's important to have cash reserves available, but $100,000 may be overdoing it. It's important to have money available in your savings account to cover unforeseen expenses. Plus, you never know when you might lose your job or see your hours (and income) get cut, so having cash reserves at the ready is important.

Is $5,000 enough for emergency fund? ›

Saving $5,000 in an emergency fund can be enough for some people, but it is unlikely sufficient for a family. The amount you need in your emergency fund depends on your unique financial situation.

Is $10,000 a good emergency fund? ›

When asked how much money they'd need to save for a financial emergency to avoid additional stress, 40% would feel comfortable having a modest amount — below $2,500 — set aside. 21% say they'd need at least $10,000 saved to feel secure.

Top Articles
Latest Posts
Article information

Author: Kelle Weber

Last Updated:

Views: 5931

Rating: 4.2 / 5 (73 voted)

Reviews: 80% of readers found this page helpful

Author information

Name: Kelle Weber

Birthday: 2000-08-05

Address: 6796 Juan Square, Markfort, MN 58988

Phone: +8215934114615

Job: Hospitality Director

Hobby: tabletop games, Foreign language learning, Leather crafting, Horseback riding, Swimming, Knapping, Handball

Introduction: My name is Kelle Weber, I am a magnificent, enchanting, fair, joyous, light, determined, joyous person who loves writing and wants to share my knowledge and understanding with you.