How Much Should You Have In Emergency Savings – What do you do if your car needs major repairs? What if you lose your job or have a long hospital stay? These are things that we don’t want to think about, but they are very important in the budget. If you save for these situations, it will make those stressful times less stressful. Emergency funds are important to help you have enough cash if you have an emergency. So, how much should you save for an emergency fund? We will answer this question and more below.
An emergency fund, or rainy day fund, is money that can be set aside for unexpected events in life. If you lose your job or have to pay a large medical bill, having an emergency fund can help protect you from life’s worst situations.
How Much Should You Have In Emergency Savings
The answer is simple: to avoid getting into debt. We don’t know what is going to happen in the future, so it is better to prepare in advance. The COVID-19 pandemic is an emergency fund example that emphasizes how important it is to save money in case of job loss or serious illness. This allows you to get through tough financial times without taking out a loan and racking up heavy charges on your credit card. The last thing you want to do in an emergency is stress about how you’re going to pay for that emergency.
Emergency Fund: How To Save For A Crisis
A recent survey from Bankrate found that 35% of Americans have less in their emergency fund now than before the pandemic began. Thirteen percent have more than before the pandemic began, and only a quarter have enough to cover six months of expenses. Twenty-one percent have no emergency savings. During the COVID-19 pandemic, many emergency funds have dried up. It is important to start saving for an emergency fund to reduce your stress in the future. Tweet
When it comes to an emergency fund, there is no one-size-fits-all approach. If you have any debt, you’ll want to start with a small emergency fund of about $1,000. If you set aside $100 per month, you will already have a $1000 emergency fund in a year.
Once you get out of consumer debt, most experts recommend an emergency fund for 3-6 months of essential expenses. A necessary expense is something you need to survive. This includes food, rent or mortgage, transportation, and utilities.
Another thing to consider is how stable your income is. If you are part of a two-income family, or if you have had a steady income for years, you need to save 3 months of funds. If you own a business, or someone in your household has a chronic illness, you may also want to save 6-12 months’ worth.
What Is An Emergency Fund And How Much Do You Need?
At the end of the day, there is no magic number. It’s important to think about your situation because it will help you determine what your goal should be. No matter how long it takes to reach your goal, it’s important to get started. You will be closer to facing the unexpected.
Start by making a list of the essentials you spend money on each month to determine how much you need to save for an emergency fund. For example, if you spend about $2,500 a month on essential expenses, you should try to save between $7,500 and $15,000 for your emergency savings. However, in some cases, you may want to save up to 12 months of expenses. Here’s a great emergency fund calculator you can use to help you determine how much you need in your emergency savings.
Your emergency fund should be in an easy-to-access, interest-bearing account. However, a high-interest account is less important than being able to access money quickly and easily.
Some great options include a simple savings account linked to your checking account, a money market account that comes with a debit card, or an online bank that pays a higher interest rate but allows you to quickly transfer money to your checking account. It is better to put this money in a separate account so that you cannot dip into it anytime.
Emergency Fund: High Value During The Covid 19 Pandemic
When you have a sudden expense, it feels urgent. However, make sure you have criteria in place to ensure that the sudden expense is truly an urgent need for funds. Don’t use it to take a vacation or spend on new clothes. Cash is what you have in case a situation arises where you actually need that money.
An emergency fund is an important part of a solid financial plan. When you start an emergency fund, it comes down to how much you save, your situation, and how comfortable you are. It may seem like a lot at first, but it will be worth it if you ever need it. You don’t need to save everything at once. It’s designed to keep you safe in an emergency, and only you know what the right amount is for you and your family. A financial planner can help you get started with your emergency fund savings and keep you on track to reach your goal.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner in Washington, DC, working with clients across the country. He holds a Masters in International Relations from SAIS-Johns Hopkins. Alvin is a partner at District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through better investing, minimizing taxes, planning for retirement and maximizing cash. Schedule a free discovery call to learn how we can help boost your finances.
District Capital is an independent, fee-only financial planning firm. We help professionals and entrepreneurs in their 30s and 40s grow their finances and maximize their money. We’re based in Washington, D.C., and we work with people virtually all over the country. Establishing an emergency fund is an important step in achieving economic stability and growth. Not only does this help protect you in the event of major expenses or a spouse losing their job, it also helps keep your other financial goals on track. As we educate clients about emergency funds, the following questions commonly come up:
How Much Should You Have In Your Emergency Fund?
In general, your emergency fund should usually be 4 to 6 months of your total monthly expenses. To calculate this, you need to complete a monthly budget that lists all your expenses. Here is a link to an Excel spreadsheet we provide to help our clients with this budgeting exercise: GFG Expense Planner.
Without cash reserves, surprising financial events like these can set you back a year, 5 years, 10 years or worse, force you into bankruptcy, and require you to move or sell your home. Having the discipline to set up an emergency fund will help you and your family survive these unfortunate events.
We usually advise clients to keep their emergency fund in a savings account that is liquid and readily available. That usually begs the question: “But my savings account earns low interest, so isn’t it a waste to have that much money sitting around earning nothing?” The purpose of an emergency fund is to be able to write a check on the spot when a financial emergency arises. If your emergency fund is invested in the stock market and the stock market drops 20%, it may be an inappropriate time to liquidate that investment, or your emergency fund amount may no longer be sufficient.
Even though that money is sitting in your savings account with very little interest, it prevents you from going into debt, taking out a 401(k) loan, or ending up investing prematurely to meet unexpected expenses.
Tips For Building Your Emergency Savings
I get a question from retirees: “Do you want your cash reserves to be large once you retire because you no longer have a salary?” In general, my answer is “no”, as long as you have 4 months of living expenses in cash, that should be enough. I will explain why in the next section.
There is such a thing as having too much cash. Money can provide financial security, but beyond that, holding money doesn’t provide many financial benefits. If your 4-month living expenses are $20,000 and you have $100,000 in cash in your savings account, an extra $80,000 over and above your emergency fund amount could probably work, whether you retire or not. You have a hard time doing anything else. There is a long list of options, but they may include:
It is not uncommon for individuals and families to struggle to accumulate 4 months of savings when they have many other savings.
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