An emergency fund is a buffer to help protect you when something unexpected happens. Having one with the right amount can better your life and provide financial peace of mind. While society is heavily focused on consumerism and spending, people forget how important it is to save.
According to a survey done in 2017, “57% of Americans have less than $1,000 in savings.” Spending just doesn’t give you the same freedom that saving does. Having an emergency fund not only protects you but also protects your long-term investments. You won’t have to pull funds out of your 401k and get penalized if you have some savings to can rely on.
Having cash on hand will also give you an advantage when it comes to buying opportunities. Those with a hefty amount of cash set aside during the 2008 financial crisis were able to benefit from the fire sale. While sitting on too much cash can be a negative thing, it’s absolutely necessary to have an adequate emergency fund.
How much is enough?
3 months of living expenses is typically the advised minimum that one should have. To find out if you meet the criteria for the minimum amount, add up your monthly expenses and multiply it by three. For example, if your monthly expenses are $2,000, you will need $6,000 in your emergency fund. While 3 months of living expenses is better than none at all, it’s better to aim for 6 months’ worth. You’ll be comfortable knowing that if something does happen, you have a half a years’ worth of savings to live off of. However, 6 months may not be enough depending on your financial situation.
Know your financial situation
There isn’t a one size fits all when it comes to how much you should have in your emergency fund. There are the general guidelines like we discussed earlier; 3 months living expenses as a minimum and 6 months is more ideal. To find out the exact amount you should have, you’ll need to assess your financial situation and goals. If you have a family or people that depend on you money-wise, then 6 months should be a min and 12 months would be ideal.
Certain medical conditions, inconsistent income, an unreliable vehicle, and other factors should be considered. If you plan on buying a home or already own one, you’ll need to tuck additional funds away. If you have reliable and consistent income, little or no dependents, and no large purchases planned, consider investing more and saving less.
Best places to keep an emergency fund
Holding cash means you will need to guard it against inflation. You’ll hear many different opinions on where you should keep your savings. Though, it’s agreed that the safest and most liquid place for it, is a savings account. Unfortunately, the interest earned in most savings accounts today is pitiful and not merely enough to keep up with inflation.
However, if you do your homework and use an online savings account, you can earn better interest than most traditional banks. Another option is to use term deposits or CDs, they offer higher interest rates than savings accounts. The longer the maturity date of the CD, the better the interest rate. With term deposits/CDs, you cannot access the money for a specified amount of time. Remember to keep that in mind if you do decide to go that route. It’s not advisable to invest money meant for emergencies into stocks. Stocks have more risk and are not as liquid as a savings account.
Don’t go overboard
There is such a thing as over saving. But, that doesn’t necessarily mean you should start spending money if you have too much in savings. Investing it instead will put your greenbacks to work. Some folks go overboard with their cash savings because they’re afraid of risking any of it in investments. If you fall into this category, you should learn more about investing or seek out a reputable financial advisor to help you. Inflation diminishes the buying power of money, so it’s imperative to create an investing plan to help protect it.
Top 5 benefits of an emergency fund
- Protects yourself and your family from unforeseen expenses/circumstances
- Eliminates stress and anxiety
- Safeguards your investments and retirement accounts
- Opens the door for more money making opportunities
- Increases your overall financial health
Through all stages of adulthood, it’s important to keep an appropriate amount of funds set aside in case of emergencies. I hope that after reading this article, you can easily determine what amount best suits you. While money isn’t everything, it is a necessity. One that we must learn to master in order to have the life we desire. If you are struggling to save, proper budgeting and cutting back on expenses can help.