Almost three in 10 US adults can’t pay off all their due bills in full each month. What’s more, there are twice as many who admit that they don’t have the means to deal with a $400 emergency expense.
Almost 40% of people cannot handle a $1,000 emergency.
All these facts and stats highlight the importance of having an emergency fund. The big question is, how much emergency fund should you have? How do you even begin to build a stash of cash for such situations?
We’ll get to the bottom of all these burning questions below, so be sure to read on!
What Is An Emergency Fund?
An emergency fund is a source of funds that can help you get through financial dilemmas. Aside from actual cash, an emergency fund could also be in the form of assets that should be easy to liquidate.
Such dilemmas can be a sudden loss of a job or an illness or injury that restricts you from working. These two are very common — in 2018 alone, there were over 900,000 cases where workers missed work due to injury or illness in the private sector.
Major home repairs, such as uninsured water damage, can also lead to substantial emergency costs. About 14,000 people in the US deal with water damage in their own homes or workplaces every day. Worse, your basement has a 98% chance of getting flooded at least once in its lifetime.
Either way, the primary purpose of an emergency fund is to create a safety net to meet these sudden expenses. It improves your financial security, so you don’t have to worry too much if you find yourself in a dire situation.
The Undeniable Benefits Of Having An Emergency Fund
With an emergency fund, you’ll worry less about being unable to pay your bills. It can help you cover expenses that you usually don’t include in your budget, such as major car repairs. If you’re an independent contractor, an emergency fund can help tide you over until you get a new project.
That said, here are two of the other most significant benefits of having an emergency fund:
Stops You From Taking on More Debt
Since you have a financial cushion for such sudden expenses, it’ll be easier to pay them off. As a result, you can minimize the need to take out high-interest loans and credit. Instead, you can focus on paying off your current investments and getting out of debt sooner.
Reduces the Need To Tap Your Retirement Funds
Three-quarters of US adults have some form of retirement funds or pension. That’s great, and all, but some of them don’t have an extra source of funds for emergencies. As such, they end up tapping their retirement savings in the face of a financial crisis.
Remember: your retirement savings will be a source of income once you do leave the workforce. You’re saving up so that you can maintain some semblance of your current lifestyle once you do retire. If you keep using it now (and be unable to “replenish” it), you’ll deplete it before you become a retiree.
If you have an emergency fund, you wouldn’t have to rely on your retirement savings.
How Much Emergency Fund Should You Have Then?
Now that you know how great having an emergency fund is let’s talk about how much you should put toward it.
At the very least, you should have three months‘ worth of living costs as your emergency funds. To give you an idea, let’s use the average annual US household expenditure of $61,224 in 2018 (or $5,102 a month) as an example.
Using those figures, this means that you should have at least $15,306, give or take, in your emergency fund.
If you have a spouse or kids who rely on your income too, then you should save up at least six months’ worth of living costs. Meaning, the least you should have in your emergency funds is $30,612.
How To Build An Emergency Fund? Know Where Your Money Goes First
The first step to becoming an active saver is to tabulate your cash inflows and outflows. “Inflows” refer to the money that you get, such as your salary. It’ll be easier to see where your finances stand based on sources of income or investment yields. Outflow is money spent.
By having a list of your cash inflows and outflows, it’ll be easier to see where your finances stand. You can create a more effective budget as you’ll have an idea which expenses to cut off or reduce. It’s also through this that you can set realistic goals on how much money you need (and from there, want) to save.
Speaking of goals, be sure to answer these questions as you prepare for your savings program:
- How much money do you have saved at the moment?
- How much money should you have saved by the end of a quarter or a full year?
- How much more money do you want to save in the future?
These questions will serve as a motivator for you to keep anything you can as savings.
Also, if you do have some savings now, you can use that as a temporary means to start your emergency fund. Return it to your actual savings account as soon as you have at least three months of emergency savings.
As you get better in stowing away funds, you can tweak your goals to save even more.
The Best Ways To Start Building Your Emergency Fund
Treat your emergency savings as a recurring expense. Don’t fall into the temptation of waiting to see how much you can save. Instead, set the money aside as soon as you receive your salary or any other income source.
That said, here are some of the ways that you can get your emergency fund started now.
A Change Jar Can Make A Difference
If you don’t have any amount saved up at all, you can start with something as small as having a change jar. Every time you get $1 or $5 bills as change, drop that in your jar. By the end of the month, you’ll be surprised at how much those “small” bills added up to.
Make sure you deposit everything in your change jar into your savings account by the end of the month. If it fills up quicker than expected, take that extra trip to the bank. This can help you avoid tapping the change you’ve saved up.
If you don’t use cash much, consider using a mobile savings app that lets you automate transfers. For instance, you can set up an app to transfer $50 a week to a separate emergency funds account.
Automate All Savings
Schedule automated transfers to your emergency account. For starters, this can be the day itself that you get paid at work.
Cut Ties With “Luxuries”
Non-essential expenses are anything that’s not a necessity to survive, including cable TV. The average cable TV user in the US only uses 6% of the service that they pay an average of $1,200 for each year. Crunching the numbers, that’s a waste of $1,128 — money that could otherwise go into an emergency fund.
Set Your Tax Refund For Direct Deposit
About three-quarters of Americans had a tax refund in 2019, the average amount of which totaled to $3,000. Whenever you expect a return, have it deposited straight to your emergency account.
Where To Put Emergency Fund?
At this point, you’re likely wondering how to store money at home. Unless it’s a change jar, it’s best not to stow your savings under your mattress. Doing so not only puts it at risk of getting spent — it’s also in danger of getting stolen.
Instead, consider putting your funds into an online checking account. Do this for the first three months that you’re building your emergency fund. This way, you get to keep your money liquid in a safe, yet highly accessible account.
If you end up not having to tap your emergency account, move the funds to a high-yield savings account. This way, you can also earn interest in case you don’t use the money you’ve saved up.
Start Preparing For Emergency Expenses Now
There you have it, your comprehensive guide on how much emergency fund you should have saved up. Now that you have a better idea, it’s time to get cracking before you face an actual emergency that you can’t cover. The sooner you start crunching those numbers, the sooner you can set and meet your savings goals.
Ready for more tips on how to grow your emergency savings account? Check out this guide on the top money-saving tips then!