What would you do if your car needed major repairs? What if you lost your job or were hospitalized for a long time? These are things we don’t want to think about but they are very important to budget for. If you save for these types of situations it will make that stressful time a little less stressful. Emergency funds are important to help you have enough money if you do have an emergency. So, how much should you save for an emergency fund? We will answer this question and more below.
What is an emergency fund?
An emergency fund, or a rainy day fund, is money that you can set aside for life’s unexpected events. If you lose your job or need to pay a large medical bill, having an emergency fund will help protect you against life’s worst-case scenarios.
Why do I need an emergency fund?
The answer is very simple: to avoid getting into debt. We just don’t know what’s going to happen in the future, so it’s best to prepare in advance. The COVID-19 pandemic emphasized just how important it is to have spare money saved in the event of a job loss or serious illness. It allows you to get through a tough financial time without having to take out a loan or accumulate hefty charges on your credit card. The last thing you want to be doing in an emergency is stressing about how you are going to pay for that emergency.
A recent survey from Bankrate found that 35% of Americans have less in their emergency fund now than before the pandemic started. Thirteen percent have more than before the pandemic started and only a quarter have enough saved to cover six months’ worth of expenses. Twenty-one percent of people have no emergency savings at all. During the COVID-19 pandemic, many emergency funds were drained. It’s important to start saving for an emergency fund to reduce your stress in the future.
How much money should you have in an emergency fund?
When it comes to an emergency fund, there is no one-size-fits-all approach. If you have any debt, then you will want to start with a smaller emergency fund of around $1,000. If you manage to put away $100 a month, you will already have a $1000 emergency fund in less than a year.
Once you are consumer debt-free, most experts recommend an emergency fund of 3-6 months worth of essential expenses. An essential expense is one that you truly need to live. This includes things such as food, rent or mortgage, transport, and utilities. 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 around $2,500 per month on essential expenses, then you should try to save between $7,500 and $15,000. However, in some circumstances, you may want to save up to 12 months worth of expenses.
Another consideration to take into account is how stable your income is. If you are part of a two-income household, or you have had a steady income for several years, then you may only need to save 3 months’ worth of funds. If you own your own business, or if someone in your household has a chronic illness, then you may also want to save 6-12 months’ worth.
At the end of the day, there is no magic number. It’s important to think about your situation as this will help determine what your goal should be. No matter how long it takes you to get to your goal, it’s important to just start. You will be much closer to staying ahead of the unexpected.
