Plan for a Rainy Day
There are plenty of reasons to have a designated emergency fund. But how much should someone set aside for it?
Before venturing into the world of emergency fund building, a person or family must negotiate their needs versus the reality of their expenditures. That’s why when calculating what you need to successfully establish an emergency fund, it’s essential to understand that you are covering things you must pay for each month — expenses like rent, car payments, utilities, groceries, or other essentials that can’t be avoided. If those expenses add up to $1,500 a month, you need to establish that as a baseline for survival in a financial emergency.
How much do you need in savings?
OppU Answers previously covered this very topic with Katie Ross from American Consumer Credit Counseling, who suggested a three to six month savings that is equivalent to three to six months worth of wages. That amount of savings can be intimidating for many, considering nearly 60% of Americans have less than $1,000 saved, according to a 2018 survey of 5,000 people by GOBankingRates. Even more concerning is that many of those who said they had less than $1,000 saved actually had no savings at all.
An emergency fund can be a lifesaver in unexpected situations, particularly when a job is lost and income is scarce. Credit cards can be a temporary solution to lean on, but if someone doesn’t have a job, the worst thing to do is dig a deeper debt hole.
According to Business Insider:
“The Certified Financial Planner Board of Standards teaches the following rules of thumb:
- If you’re a single-earner household, you need a minimum of six months worth of expenses saved.
- If you’re a double-earner household, you need a minimum of three months worth of expenses saved.
- If you’re a single-earner household with a second source of sizable income, you need a minimum of three months worth of expenses saved.”
Tanza Loudenback at Business Insider goes on to say that having a target number feels more achievable than throwing a saved dollar or two at an unnamed amount. It’s also a great idea to jump-start an emergency fund with any bonuses, tax refunds, or other financial windfalls that come your way.
Quick tips for building your fund
Knowing that it can be difficult for folks to pull together a comfortable emergency fund, Ross provided three feasible options for those looking to bolster their savings. These are ways a person can start saving immediately even with just a little at a time:
- Take a set percentage of every paycheck and put it into savings.
- If you receive a tax refund, plan to put half of it into the fund immediately.
- If you work more than one job, put the majority of your second paycheck in savings every pay period.
Last, Ross said if you’re looking to build your fund quickly, try to put away any money that doesn’t go toward expenses into the fund. That way you build up your emergency savings and you don’t blow through extra income.
Loudenback on the other hand recommended her method of building savings. Instead of making your savings an option, treat it as an expense. Here’s what she wrote on the matter:
“I basically started to treat my savings an expense and set up direct deposits from my paycheck into a high-yield savings account at a different bank than where I keep my checking account to avoid the temptation to dip into it for a non-emergency,” she wrote. “Saving off the top meant I never had to contemplate what I was going to cut out in order to save more. I worked backwards in a sense — I picked a savings amount that would give me a solid emergency fund in less than two years and forced myself to live on what was left over.”
Prepare while you can
Whether you’ve got nothing saved or have $10,000 in the bank, it’s important to prepare for the worst-case scenarios. You never know when an emergency will strike, hence the term, so it’s better to prepare while you can for the times when the unexpected hits.
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