Everyone needs an emergency fund. A bold and broad-sweeping statement, I know. But in an industry without many absolutes, we can say you absolutely need an emergency fund.
Everyone needs an emergency fund. A bold and broad-sweeping statement, I know. But in an industry without many absolutes, we can say you absolutely need an emergency fund. As a planner, I’ve been teaching this for years and I never would have predicted a pandemic would be the reason, but here we are. The concept of an emergency fund has been validated over and over this year as we’ve seen millions unemployed in the US, and many companies temporarily reduce salaries as they scramble to forecast earnings. Those who were prepared with an emergency fund have been able to get by and now is the time to access those funds.
There’s no better time than now to start to build a cushion for the next emergency, whatever it may be.
Highly prioritize your emergency fund savings (even over paying down debts) until you have at least $5,000. Any adult in the workforce should plan for a minimum emergency fund of $5,000 to cover job loss, medical expenses, car problems, or any other unexpected expenses.
Tip: Use large one-time windfalls like a tax return or bonus payment to jumpstart your emergency fund savings.
Once you have $5,000, you probably need to save more, but you can slow down a bit. A sustainable emergency fund target for each household is equal to 3-6 months of household spending. For single income households, we recommend the larger emergency fund equal to six months of spending. If you have a dual income household, you can reduce your emergency fund to three months of spending assuming you have a second income to fall back on to cover expenses in the event someone’s income is reduced or eliminated.
If you have high interest debts (usually those with interest rates over 5%), you may want to reduce your monthly savings rate to allow you to put more money towards paying down these debts (once you’ve reached a minimum emergency fund of $5,000).
Example: If you were previously saving $400 per month and paying the minimum required amount on your credit cards, you may want to decrease your savings to $200 per month and pay an extra $200 per month towards credit card debt. But only after you have at least $5,000 in your emergency savings account. This will prevent you from incurring additional credit card debt in the event of an emergency in the future.
Tip: Utilize a high yield savings account to earn a little yield on your savings.
Once you’ve reached your sustainable emergency fund goal of 3-6 months of your household spending, take a vacation! Just kidding; however, you can take a vacation from emergency-fund saving. This is a major step towards financial security! Now you can focus on saving for goals like a house down payment, travel or even retirement!
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