For years the advice was to have an emergency reserve of cash savings to handle unexpected expenses.  In the old days, we used to call this the “coffee can fund”.  The idea was that you would put a few dollars into a coffee grounds tin each month until you (hopefully) got to the magical figure of $400 and this would cover you in case something unexpected happened.

What kinds of things can happen?  Your car could break down.  Your home could need an emergency repair.  You could get sick and have an unexpected medical bill.  You might have to take some time off of work to care for a relative, or deal with an injury.  These are the kinds of emergencies that you simply can't budget for and the $400 emergency fund was supposed to handle.

It was (and remains) good advice and a financially responsible thing to do.

First, let's talk about the good news.  According to the Federal Reserve, in 2022, the share of U.S. Households with a small cash reserve savings of $400 or more had reached the highest percentage since 2013.  Having said that, according to a recent article in Fortune magazine, nearly 4 in 10 adults do not have at least $400 in cash reserves.  Bloomberg claimed that nearly 2 in 3 U.S. adults could not meet the $400 figure.

Now let's talk about the bad news.  According to the Federal Reserve, and a recent survey by the LendingClub, the data shows that your emergency fund needs to be significantly higher than $400.  In the survey, 20% of U.S. adults had major unexpected medical expenses in the prior 12 months with the median out of pocket cost being between $1,000 - $1,999.  According to a recent survey, the average unexpected emergency cost to a U.S. family was around $1,400.

This is what I've experienced as a Bankruptcy attorney for over twenty years.  People rarely go into Bankruptcy because they were wildly irresponsible.  The vast majority of people get driven into debt because it seems like the only solution when confronted with an unexpected hit to their monthly budget.  The problem is that they never develop a solution to get out of debt, but rather opt for the convenience of monthly minimum installment payments.  Then when the next emergency arises, they go into debt again.  Once you start down that path, it just gets easier, but eventually it catches up to you.

What brings the client to my office is usually two unexpected emergencies in a row.  I find that most people can withstand one emergency, but two in a row drives them over the edge and then they come to see me about a Bankruptcy.

So how can you avoid a Bankruptcy, or if you've had one, how can you avoid needing to file again?  The old advice about a cash reserve for emergencies is still good, but we have to recognize that the old $400 figure has not been relevant for years.  Everything from oil changes to a carton of eggs costs more today, and your emergency cash reserve fund needs to reflect that as well.  According to Forbes magazine, the average cost of an ambulance ride to the hospital is $568, and the average cost to replace 4 tires on your car is $668.  I would say that that they average single adult should try to plan for a cash reserve of at least $1,700 and a family should plan for an emergency cash reserve of at least $2,500 in order to withstand (using cash only) at least two emergencies in a row.

That is a lot of money for most people, but without it, you will have no choice but to seek out high interest credit to get through an emergency.  It might take a year or more to save that much, and it could be eaten up by an emergency each year, (which is very frustrating because you feel like you are never getting ahead), but you have to think about the fact that you did not fall behind.  Resist the temptation to treat the fund like vacation money.  It should be used for emergencies only…and trust me…it will happen.  Into every life, a little rain must fall, but it doesn't have to cripple you or drive you into Bankruptcy if you do a little bit of planning ahead of time, but the old $400 cash savings figure has (sadly) gone the way of VHS tapes and dial up modems.