Tuesday, 2 March 2021

How Much You Need to Have a 6-Month Emergency Fund in the 100 Largest U.S. Cities

How Much You Need to Have a 6-Month Emergency Fund in the 100 Largest U.S. Cities
20 Jan
9:31

Updated on Wednesday, January 20, 2021

Having emergency savings as a fallback plan can be especially important amid a global pandemic. But, according to an analysis of data from the U.S. Bureau of Labor Statistics, San Francisco residents need to have an average of $54,608 saved if they want a six-month emergency fund — the highest amount among the 100 largest U.S. cities.

That’s a problem, as a recent MagnifyMoney survey found that 42% of consumers have less than $5,000 in emergency savings. MagnifyMoney researchers calculated the average household’s monthly expenses in these 100 cities to see how much money residents would need to save to build a six-month emergency fund.

Here’s what we discovered.

Key findings

  • The average San Francisco household should have $54,608 in their emergency fund if looking to cover six months of expenses, which we estimate to be about $9,100 a month. Arlington, Va. ($52,799), and San Jose, Calif. ($51,096), require the next highest emergency funds.
  • Among the 100 largest U.S. cities, the Midwest tends to have the lowest emergency fund requirements. Cleveland ($14,132), Detroit ($14,975) and Toledo, Ohio ($16,185), rank in the bottom three spots.
  • California has five cities ranked in the top 10 places where people need the largest emergency funds — San Francisco, San Jose, Irvine, Chula Vista and San Diego. Estimated monthly household expenses in these five cities average $7,711.

5 cities where you need the most in emergency savings

1. San Francisco

  • Monthly income: $10,322
  • Monthly expenses: $9,101
  • Emergency savings needed to cover 6 months of expenses: $54,608

San Francisco residents have the highest median household income among the 100 largest cities — $123,859, or more than $10,000 a month. The flourishing tech industry and the city’s adjacency to nearby Silicon Valley both contribute to this.

But these factors drive up costs. In fact, according to employment compensation data site PayScale, the cost of living in San Francisco is 80% higher than the national average. Plus, average monthly expenses in the city — $9,101 — are about $300 more than the next city on the list. In simpler terms: A high cost of living could impact residents’ ability to put money in their savings accounts.

San Francisco, with a population of more than 881,000, has one of the most competitive real estate markets in the U.S., according to LendingTree. The median rent for an apartment in the city is $1,895 a month, while the median home value is nearly $1.1 million.

2. Arlington, Va.

  • Monthly income: $9,980
  • Monthly expenses: $8,800
  • Emergency savings needed to cover 6 months of expenses: $52,799

The median household income among Arlington residents is $119,755, or just under $10,000 a month. As such, it makes sense that the cost of living there is 44% higher than the national average. In fact, housing costs in Arlington are 134% higher than the national average, pushing monthly expenses — and what would be needed in a six-month emergency fund — higher.

Arlington has a population of nearly 237,000, which puts it toward the bottom of the 100 largest cities. The median rent for an apartment in the city is $1,970 — higher than San Francisco — while the median home value is $705,400.

3. San Jose, Calif.

  • Monthly income: $9,658
  • Monthly expenses: $8,516
  • Emergency savings needed to cover 6 months of expenses: $51,096

San Jose is the third-largest city in California, but it has the largest population among the top five cities where the largest emergency savings would be needed to cover six months.

Because of its location at the center of Silicon Valley, it’s quite expensive to live there. Many of the tech giants headquartered here pay their employees well, which drives up real estate prices accordingly. The cost of living in San Jose is 49% higher than the national average, but that jumps to 148% higher when comparing housing costs.

San Jose, with a population of more than 1 million, has the most competitive real estate market in the U.S. The median rent for an apartment in the city is $2,107, while the median home value is more than $864,600.

4. Irvine, Calif.

  • Monthly income: $9,298
  • Monthly expenses: $8,199
  • Emergency savings needed to cover 6 months of expenses: $49,192

This Southern California city’s education system is regarded as one of the best in the U.S.: The city’s students typically have the highest SAT scores in Orange County and more than 90% go on to attend college. And with a smaller population — nearly 287,500 — as well as being credited as the safest city of its size for 15 consecutive years, Irvine has become a haven for wealthy families to be able to settle down and raise children.

However, it’s also an expensive place to live, as the cost of living in Orange County is 52% higher than the national average. This high cost of living would require higher emergency funds for its residents.

Irvine’s population puts it ahead of Arlington, but none of the other cities within our top five. The median rent for an apartment in the city is $2,361 — highest among our top five — while the median home value is $838,000.

5. Seattle

  • Monthly income: $8,541
  • Monthly expenses: $7,531
  • Emergency savings needed to cover 6 months of expenses: $45,185

Seattle has one of the highest sales tax rates in the U.S. at 10.1%, and this drives up the cost of living, including transportation (33% higher than the national average) and groceries (27% higher). Overall, the cost of living in Seattle is 49% higher than the national average.

Its booming job market (pre-crisis) also has an impact on housing costs being 94% higher than the national average.

Seattle has a population of nearly 754,000. The median rent for an apartment in the city is $1,614, while the median home value is $663,100 — lowest among our top five.

5 cities where you need the least in emergency savings

100. Cleveland

  • Monthly income: $2,671
  • Monthly expenses: $2,355
  • Emergency savings needed to cover 6 months of expenses: $14,132

The poverty rate in Cleveland is 33%, compared with the U.S. average of 11%. However, the median rent for a city apartment is $719 — lowest among our bottom five — and the median home value is $69,600. That means it’s much easier to find an affordable home in Cleveland than in cities like San Francisco or San Jose.

Different from the cities in our top five, the cost of living in Cleveland — where the population is about 381,000 — is only 1% higher than the national average. The same stands for Cleveland health care, which is only 1% higher than the average, too.

99. Detroit

  • Monthly income: $2,830
  • Monthly expenses: $2,496
  • Emergency savings needed to cover 6 months of expenses: $14,975

Detroit was once the center of the country’s auto industry, but the Motor City’s economy has shifted downward over the years. Detroit’s population declined 6% between 2010 and 2019, and its poverty rate sits at 35%.

The median rent for an apartment in the city is $824, while the median home value is $49,200, which is 29% lower than the median home value in Cleveland. The cost of living in Detroit — which has a population of more than 670,000 — is 3% lower than the national average.

98. Toledo, Ohio

  • Monthly income: $3,059
  • Monthly expenses: $2,697
  • Emergency savings needed to cover 6 months of expenses: $16,185

Although the city’s population has declined 5% over the past decade, Toledo is one of the best midsize cities for millennial homebuyers, according to Construction Coverage. The median rent for a Toledo apartment is $725 and the median home value is $80,800.

Toledo’s poverty rate — 26% — is lower than Cleveland’s and Detroit’s, but it’s still 136% higher than the U.S. average of 11%. Plus, only 18% of the city’s population older than 25 have a bachelor’s degree or higher, compared with the U.S. average of 32%. This could be shrinking the monthly income of residents in Toledo, where the population is nearly 273,000.

97. Birmingham, Ala.

  • Monthly income: $3,063
  • Monthly expenses: $2,701
  • Emergency savings needed to cover 6 months of expenses: $16,204

Almost everything in Birmingham costs less than the national average: Health care is 16% lower, housing is 14% lower and groceries are 4% lower. The overall cost of living is 9% lower than the natural average. What that means is your money could stretch much further in Birmingham — where the population is nearly 209,500 — than in other cities, even if the hourly wages here are also 9% lower than the national average, too.

The median rent for a Birmingham apartment is $837 and the median home value is $91,900. Meanwhile, the state has the second-lowest property taxes in the nation, resulting in affordable housing opportunities that are hard to find in other cities, despite a poverty rate of 26%.

96. Rochester, N.Y.

  • Monthly income: $3,143
  • Monthly expenses: $2,771
  • Emergency savings needed to cover six months of expenses: $16,626

Although property taxes are high here, the lower cost of housing means that buying a home in Rochester is still affordable for many residents. In fact, 77% of homes in the area are within financial reach for those making the median income in the city ($37,711).

Health care costs in Rochester — where the population is nearly 205,700 — rank 2% lower than the national average, though the cost of living is 1% higher than the national average and the poverty level in the city is 31%.

How much money is in emergency funds? Not much

A recent MagnifyMoney survey of more than 1,000 consumers investigated how Americans used their emergency funds during the coronavirus pandemic. Notably, the survey revealed how much money people at different household income levels had saved up for a financial crisis.

San Francisco residents — with a median household income of $123,859 — need to have an average of $54,608 to keep a six-month emergency fund, but only nearly 2 in 5 (39%) with income over $100,000 have $20,000 or more in their emergency fund.

On the other end of the spectrum, the average Cleveland household with a median income of $32,053 would need $14,132 to have a six-month emergency fund. However, the survey revealed that only 13% of people with an income between $25,000 to $34,999 have saved between $10,000 to $14,999 in their emergency fund.

“Having six months of expenses stashed away is a common rule to follow but — unfortunately — it’s realistic mostly for those who are lucky enough to have discretionary income,” said Lauren Perez, MagnifyMoney deposits writer. “For many who live paycheck to paycheck, there is not much room, if any at all, to set aside money after paying bills and putting food on the table.”

In 2020, the average American household had $5,315 in credit card debt, according to credit bureau Experian. Struggling to pay off consumer debt like this makes it difficult for many to save an adequate amount for emergencies, even in a relatively stable economy.

“Of course, the pandemic has only exacerbated these inequality issues across the country, with job and wage loss, so it may be even harder for millions of people to build up that fund,” Perez said. “If you can set money aside for an emergency fund, know that you don’t have to do it all at once. Set aside what you can each month and build your way up to that six-month amount.”

How to grow your emergency fund amid a pandemic

  • Make minimum payments on your debts. Paying only the minimum required amount allows you to save money where you can, while also making the on-time payments required to keep your credit healthy. Although paying down your debt can lower your credit utilization ratio, the cash you save now will be helpful in the event of a financial emergency.
  • Set aside any extra money you get. “It’s tempting to go out and spend any extra money we come across,” Perez said. “But in these situations, the smartest choice would be to set it aside in savings or pay down debt.” Open a savings account with a financial institution offering additional bonuses to cushion your emergency fund further.
  • Automate your savings contributions. Set up your bank account to make regular direct deposits to a high-yield savings account. Look for online banks in particular, which typically offer higher savings due to lower overhead costs. This ensures that your money works harder than it would if you put it into a regular savings account.
  • Put other financial goals on hold. If you don’t have a sizable emergency fund yet, consider siphoning all your extra funds into one until you’ve reached your target savings amount. You may see greater returns if you put your funds into a retirement account, for example, but you won’t have the freedom that liquid cash gives you in a financial emergency.

Methodology

MagnifyMoney researchers analyzed Consumer Expenditure Survey data from the U.S. Bureau of Labor Statistics for the 100 largest U.S. cities to rank them by how much the average household should have in an emergency fund. To create the rankings, we first found how much the average household spends a year compared to their income. We then took that number and applied it to the 100 largest cities and estimated the value of six months’ worth of expenditures. 2019 median household income data comes from the U.S. Census Bureau. Cost-of-living data comes from PayScale.

Source: https://www.magnifymoney.com/blog/banking/emergency-fund-cities-study/

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