If you have been reading the news lately, then you know that the U.S. Unemployment Rate is currently at 9.1%, which means more than half of Americans are either unemployed or underemployed and looking for work in a tight labor market.
If you find yourself in this situation and would like some guidance on what to do next, keep reading. In this blog post, we will discuss how much money you should have in your emergency fund and what to do if you don’t have one.
When it comes to your personal finances, it is always best to be prepared for the worst-case scenario. This is where an emergency fund comes in. An emergency fund is a savings account that is used to cover unexpected expenses, such as a job loss, medical bills, or home repairs.
So, how much money should you have in your emergency fund? The answer may vary depending on who you ask, but most financial experts recommend having at least three to six months’ worth of living expenses saved in your checking or saving accounts.
Personally, I think I can sleep well at night with at least 6, or 9 months of living expenses to prepare for any rainy days. Why? With this current rise in inflation and the potential risk of job loss, I do not want to invest too much just to have to sell when I need cash the most, in any undesirable situations.
1. Everyone’s definition of “emergency” is different, so you should tailor your fund to your specific needs.
When it comes to financial planning, it’s important to have an emergency fund that can cover unexpected expenses. But what exactly qualifies as an emergency? Some people might define it as a job loss or major medical bills, while others might consider it something as minor as a broken appliance. The truth is, that everyone’s definition of an emergency is different, so it’s important to tailor your fund to your specific needs.
Think about the kind of emergencies you’re most likely to face and make sure your fund is large enough to cover them. If you’re worried about job loss, for example, you might want to have enough money saved up to cover several months’ worth of living expenses. Or if you’re concerned about medical bills, you might want to have enough to cover your deductible and any out-of-pocket costs.
You have to be honest to assess your potential income stream, your stage of life, your health condition and many other factors.
2. An emergency fund is not the same as a rainy day fund.
It’s important to distinguish between an emergency fund and a rainy day fund. A rainy day fund is a savings account that you can use for unexpected expenses, such as a car repair or a trip to the dentist. An emergency fund, on the other hand, is a savings account that you can use to cover major expenses, such as a job loss or a medical emergency.
3. You should have enough money saved up to cover at least 3-6 months of living expenses
It’s always a good idea to have some money saved up in case of an emergency, but how much you need to save depends on your situation. If you have a full-time job with a steady income, then you should aim to have enough saved up to cover 3-6 months of living expenses. However, if your income is less predictable, or if you have dependents, then you may want to be extra careful and save up to 9-12 months of living expenses. In either case, it’s important to have a plan for how you will access your savings in an emergency. For example, you may want to open separate savings account that you only use in case of an emergency. Or you may want to keep some cash
4. If you have debt, focus on paying that off before saving for an emergency fund
Many people find themselves in debt at some point in their lives. While it can be tempting to put all your focus on paying off that debt as quickly as possible, there are benefits to saving for an emergency fund first. Having an emergency fund gives you a cushion to cover unexpected expenses without having to rely on credit. This can help you avoid getting further into debt or facing late fees and other penalties. In addition, an emergency fund can help you weather financial setbacks, such as a job loss or medical bills. So if you find yourself with debt, focus on building up your savings before making extra payments on your debt. Doing so can give you peace of mind and help you avoid getting deeper into debt in the future.
5. Make sure you’re contributing to your emergency fund regularly, even if it’s just a small amount each month
One of the best ways to make sure your emergency fund is there when you need it is to contribute to it regularly. Try setting up a monthly or weekly transfer from your checking account to your savings account. Or, if you get paid biweekly, you could set up an automatic transfer on payday. Even if you can only afford to save a small amount each month, those savings will add up over time. And if you ever do find yourself in an emergency, you’ll be glad you have that money set aside.
6. Review your emergency fund periodically to make sure it still meets your needs
Your emergency fund is not something you set and forget. As your life changes, so too will your need for an emergency fund. That’s why it’s important to review your fund periodically to make sure it still meets your needs. For example, if you have a family, you may need to have more saved up in case of an unexpected medical expense. Or if you get a new job with a higher salary, you may be able to reduce the size of your emergency fund. By reviewing your fund regularly, you can make sure it’s always there when you need it.
Having an emergency fund is a crucial part of financial planning. It can help you cover unexpected expenses without going into debt. And it can give you peace of mind knowing that you’re prepared for whatever comes your way. To make sure your emergency fund is there when you need it, contribute to it regularly and review it periodically. By doing so, you can rest assured that you’re always prepared for the unexpected.