If you’re looking for an answer immediately, then you’re looking to cover your existing expenses for several months. The answer is general due to how many factors affect it.
Why do you want an emergency fund? It’s there for everything from an unexpected home repair, a large medical bill, or in the unfortunate case of you losing your job.
Kenneth Chavis, who works as a wealth advisor for LourdMurry, added, “It will happen suddenly and unexpectedly, and having those funds available will help you get through the emergency with one less stressor to worry about.”
You’re probably not prepared for a financial emergency
Even knowing this rule of thumb above, most Americans aren’t ready. A recent survey by YouGov stated that around 10% have no savings, and another 13% have $100 or less. Over 50% have only $5,000 at most, meaning during an emergency, people will go towards credit cards and loans.
How an emergency fund is essential
Laura Sterling, who is a Vice President for marketing at Georgia’s Own Credit Union, said that “When you have funds safely put away, they will be there in case of that sudden emergency so you don’t financially drown during these trying times. It will also have you avoid those high-interest rate personal loans as well.”
Obviously, we’re never really prepared for an emergency or an unexpected financial bill. It just happens. Yet having the liquidity is key in these matters.
Harman Johal, Senior VP and Market Leader for Texas and Illinois for U.S. Bank stated that “interest rates are on the rise, and that will make the cost of credit much higher than in the past, meaning the cost of a financial emergency only going up.”
A great example is to look at early 2023 when the average interest rate for a credit card was over 20%. That means whatever the emergency ends up being, it just got that much more expensive versus having the available funds.
Ok – so how much should I really be saving?
It’s better to be safer than sorry, so it’s always a good idea to go toward the half-year mark. Six months of savings equal to what your expenses would be is ideal. Remember, this is your costs, such as utilities, food, and housing-related fees, not the actual income.
Chavis also adds, “Keep in mind to consider more than just covering expenses, but where you are in life, your employment history and the industry you work in, as that could be tougher to get back into the workforce for. For example, someone who already has sizeable assets and a steady job that’s in demand may need a smaller emergency fund than someone with fewer assets and less job stability.”
Those that have income that isn’t consistent, whether through being self-employed or already retired, should have a much larger emergency fund that’s ready to also cover expenses when there’s no income coming in. Also, those that may have medical issues should consider a larger emergency fund.
Is there a specific type of account for the emergency fund?
You want to be able to readily utilize the funds when necessary but also earn a healthy rate at the same time.
Remember, this is still money, and although you’re putting it away, you want to take some points into consideration. Firstly you want to ensure complete accessibility as you don’t want to be fumbling about trying to access these funds during an emergency. Secondly when it’s not in use it shouldn’t just sit there but try to get some type of return.
Sterling goes on to add, “Look for an interest-bearing account, so when your fund is sitting there, you’re still collecting interest. Make sure the account can be withdrawn with no fees wither.”
The best option would be a simple savings account that easily remains liquid instead of accounts that lock in your money for a certain period of time.
Chavis agrees and says, “Pick that account that keeps you liquid, so if it’s requested, you’re not stressing about getting those funds out.”
A good strategy to build up your emergency funds
Below we’ll find some simple and easy actions you can take so your fund is at the right levels in no time.
- Start small – At the same time, stay consistent as well. You want to slowly grow your emergency fund and start with a small portion every time you’re paid. If you try to save too much too quickly early on, you wont build the right type of habit for your savings.
- Have goals in place – Know when you’ve hit your target and be proud of that milestone. Have your first target be a few hundred dollars, then grow from there. “Celebrate those mini victories when you’re starting outspread across multiple smaller goals.” Says Sterling.
- Automation is your ally – Just like you may get direct deposit into your account every pay period, you can then set up automatic transfers to your savings account, which Sterling also recommends. Eventually, you’ll see those amounts grow.
- Be honest with yourself – That also means being accountable. Johal mentions that it’s good to share with friends and family that you’re starting to take this responsible route. It will hold you liable to maintain and grow these emergency funds.
- Make sure to define it properly – While saving up for an emergency is important, Sterling believes you should consider it like a bill, meaning that it’s as important as your other expenses and should be part of your overall budgeting.
Having an emergency fund is one of many steps to becoming financially fit and stable in your life. Being able to handle something like this will only lead to a more positive overall lifestyle since you will have one less stressor to worry about in the random moment an emergency does actually happen.
Johal adds, “Financial health is just as relevant to your well-being as mental or physical health and needs to be taken care of from the beginning.” It also needs to come with the right type of plan, consistency, discipline, and mindset.