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How Much Do You Need in an Emergency Fund?

How Much Do You Need in an Emergency Fund?

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Budget all you want, but sometimes, some things take you by surprise. Your water heater can stop working one day, or your car needs a new tire after springing a leak. These unexpected expenses can throw you for a loop if you don’t have an emergency fund.

An emergency fund is a savings account full of cash you don’t spend. It’s there purely as a contingency plan, acting as a safety net for when your carefully constructed budget falls short of what you need in an emergency.

Life can throw some pretty sharp curveballs your way, so it’s important you have an emergency fund that can handle any emergency. But how much do you need to save in this fund to be prepared?

The Golden Rule of the Emergency Fund

Traditionally, financial advisors recommend saving anywhere between three to six months’ worth of living expenses. That means an emergency fund will differ depending on your lifestyle, not your income.

Someone earning $45,000 a year could require the same sized emergency fund as someone earning $80,000 if they have similar bills and spending habits.

To find out what your savings goal should be, you’ll have to sit down with your budget and track your spending. Go back three to six months to get a good idea of your habits, making sure to include every last penny.

The reason why financial advisors specify expenses is to protect you in case you lose your job. With six months of living expenses saved up, you have six months to find a job. In the meantime, you’ll be able to pay rent, buy groceries, and even go out for drinks.

What if Your Emergency Fund isn’t Enough?

Saving six months of expenses can be challenging, especially if you’re spread thin as it is. Hitting this goal can take time, and you might run into an emergency before you achieve it.

If you’re struggling to cover an unexpected emergency repair or medical expense, an online installment loan may act as a patch job for your savings. You can find online installment loans with simple, quick applications that work well under pressure.

All you have to do is fill out some basic financial information to see if you qualify. Some installment loans arrive by the next business day, so you can pay an urgent expense with fewer delays.

Will Saving More Give You Better Protection?

In an ideal world, you’ll find saving six months’ worth of expenses a breeze. Should you keep saving once you hit this goal?

It depends on who you ask. Some advisors like Suze Orman and David Bach recommend upping your goal to a full years’ worth of expenses to reflect the times.

Although it may feel like life has returned to normal, the pandemic still very much affects the world. With a full year of savings under your belt, you have 12 months to get back on your feet.

That said, you shouldn’t save too much more than this. An emergency fund must be available at a moment’s notice, so you’ll be leaving it in a basic savings account.

Here, large savings won’t earn much in interest. If you don’t spend it all soon, you’ll technically lose money to inflation.

So if you’re a super saver, put any surplus savings into stocks, mutual funds, or some high-yield savings account. This gives you the best of both worlds: security in times of crisis and long-term growth for future financial goals.

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