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3 to 6 months of savings might be 'tried and true wisdom' but this expert has advice if you're living paycheck-to-paycheck

Two people share why the conventional wisdom of saving three to six months' worth of living expenses in an emergency fund isn't practical advice right now.

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Emergency savings come in handy for all sorts of disruptions in life. Putting money in a high-yield savings account can help you pay for unexpected expenses, such as medical bills, or weather unexpected events like losing your job.

But just how much you should have stowed away in an emergency fund can vary depending on who you ask.

While financial experts generally suggest setting aside three to six months' worth of your living expenses in an emergency fund, the global pandemic that has put tens of millions of Americans out of work is shifting some to tailor this advice.

"In some cases, we need to throw conventional wisdom out the window," Lynnette Khalfani-Cox, The Money Coach® and author of Zero Debt: The Ultimate Guide to Financial Freedom, tells CNBC Select. "To the extent that some people are still saying you need three to six months, I feel like that's not taking the temperature in the room correctly."

Below, we hear from Khalfani-Cox, as well as an economist, on advice for saving money in an emergency fund during this time.

How much to save, from a personal finance expert

While Khalfani-Cox recognizes that saving three to six months of expenses is "tried and true wisdom that works over the long haul," she also points out that before the coronavirus pandemic began, almost half of Americans reported struggling being able to afford a $400 emergency expense.

Now that over 40 million people have filed for unemployment and the virus is still spreading, Khalfani-Cox says that saving three to six months of expenses is impractical advice.

"It is unrealistic and almost deceiving to tell people who are trying to get by, who are living paycheck-to-paycheck or living on unemployment...it's wholly unrealistic to start talking to them about having six months of savings," she says.

While you do need to save some amount, just how much is dependent on your individual income and comfort level. 

For example, if you are making 25% less than what you were making pre-pandemic, save 25% less. Or if you say you can save $25 a paycheck, then $25 it is. "Everybody, individually, needs to look at the facts and figures of their lives given where they are," Khalfani-Cox says. 

How much to save, from an economist

Even economist Emily Gallagher, an assistant professor of finance at the University of Colorado Boulder, whose co-authored 2019 report, "Rules of Thumb in Household Savings Decisions," suggested saving a minimum amount of $2,467, says her past advice "in no way accounts for the time of crisis we are in now."

Looking at historical data spanning 2010-2012, Gallagher came to the $2,467, or 1-month-income savings, target for American households making less than 200% of the poverty line (or about 30% of the working U.S. population). For a family of four, this is an income of roughly $30,000 or less per year.

The $2,467 savings figure is a more financially attainable and realistic target to give low-income savers (who generally put aside only a few hundred dollars per month), rather than advising them to save six months of expenses. Gallagher argued that those who have that minimum amount saved have a lower probability of financial hardship and are less likely to fall behind on paying rent, bills or medical care in the future.

But while it's a promising savings goal that may still work, a lot remains up in the air for how much people should save in today's economy.

"That savings target depends on how the government responds to this crisis," Gallagher says. "That response (and, in turn, the appropriate savings target to weather this crisis) is anybody's bet."

The government's support thus far, in the form of stimulus checks and enhanced unemployment benefits, may be opportunities where you can use that influx of cash to put toward savings. If you're out of a job but have enough to cover your basics, consider saving even a small fraction of the extra $600 per week in unemployment compensation. If, like many Americans, you've already used your $1,200 stimulus check, make a plan to save any money you do receive in the next phase of coronavirus relief, which is expected to pass by the end of this month.

How to come up with money to save

Though Gallagher couldn't pinpoint a savings target for the "new normal" that we live in, any amount you can save is a good first step.

To find the extra money to save, Khalfani-Cox suggests that people take a pause, reassess things and consider which old rules they can put on the back burner for now. 

Below are two ways she says you can alter your financial habits to save more.

1. Only make the minimum payment

The traditional guidance is to pay off your credit card balance in full each month, but if you're worried about your job, or already experienced a pay cut, reduced hours or unemployment, only make minimum payments on your bills. By paying only the minimum, your balances will increase (which increases your credit utilization rate and lowers your credit score), but you will at least be maintaining a record of consistent and on-time payments.

"Right now, cash is king," Khalfani-Cox says. "We don't know how long you'll need that extra money that you're using to pay your debt." She makes it clear that it's important to pay off your credit card — in fact, carrying a balance will cost you in high interest over time — but if your income stream has slowed down significantly, holding off on debt can help you temporarily stretch your cash.

For example, assume you are carrying the American average of $6,194 in credit card debt and decided that you were going to use $200 of your monthly income toward paying it off. If you instead paid just the minimum — which is traditionally calculated by taking 1% to 3% of the balance (we'll use 2% here) — you would put $123.88 toward your credit card debt to keep you account in current standing, and also allow $76.12 to be stored away in savings.

 While you take this approach, keep non-essential spending to a minimum.

2. Save in a cyclical manner

To save cyclically means your savings ebbs and flows with your income stream. To use the example above, if you are making 25% less this month than you were last month, save 25% less than what you would. This approach is good for those with an inconsistent income (such as self-employed people), but it applies now when many are seeing a dip in earnings.

Khalfani-Cox suggests making small goals for yourself, whether it's saving a specific dollar amount or a certain percentage relative to your current income. 

"The discipline factor comes in when you know you can be consistent," she says. "You want to build that financial muscle," she explains, even if the monthly amounts differ.

Once you are more stable, you can then focus again on paying your credit card balances. When that time comes, you might consider applying for a card with an introductory 0% APR period to help you pay them off quicker. For example, the Wells Fargo Active Cash® Card offers 0% intro APR for 15 months from account opening on purchases and qualifying balance transfers (after, 20.24%, 25.24%, or 29.99% variable APR; balance transfers made within 120 days from account opening qualify for the intro rate and fee of 3%, then a balance transfer fee of up to 5%, $5 minimum, applies; see rates and fees).

Bottom line

With the economy in limbo, combined with a public health crisis, people are facing enormous challenges. When it comes to saving your money, know that any amount will help.

"Tens of millions feel further in the hole than they did three and a half months ago," Khalfani-Cox says. "I think we need to offer people a lifeline; it's about offering hope and inspiration and a feeling that they can do this."

So if putting aside three to six months of savings feels like an insurmountable climb, ask yourself what is attainable, remain hopeful and try to not give up.

Don't miss: Emergency funds can offset surprise medical bills, unemployment and more—here's how to get started

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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