Your Emergency Fund: How Much is Enough?
Have you ever had one of those months? The water heater stops heating, the dishwasher stops washing and a family member ends up at urgent care. Then, as you’re driving, you see smoke seeping out from under your hood.
Bad things happen to the best of us, and instead of conveniently spacing themselves out, they seem to come in waves. The important thing is to have a financial life preserver in the form of an emergency cash fund.
Although many people agree that an emergency fund is an important resource, they’re not sure how much to save or where to keep the money. Others wonder how they can find any extra cash to sock away. One recent survey found that 29% of Americans lack any emergency savings whatsoever.
How Much Money?
When starting an emergency fund, you’ll want to set a target amount. But how much is enough? Unfortunately, there is no “one-size-fits-all” answer. The ideal amount for your emergency fund may depend on your financial situation and lifestyle. For example, if you own your home or provide for a number of dependents, you may face more financial emergencies. If the crisis is a job loss or injury that affects your income, you may need your emergency fund for an extended period of time.
Coming Up with Cash
If saving several months of income seems an unreasonable goal, don’t despair. Start with a more modest target, such as saving $1,000. Build your savings at regular intervals, a bit at a time. It may help to treat the transaction like a bill you pay each month. Consider setting up an automatic monthly transfer to make self-discipline a matter of course.
Once you see your savings begin to build, you may be tempted to use the account for something other than an emergency. Try to budget and prepare separately for bigger expenses you know are coming. Keep your emergency money separate from your checking account so that it’s harder to dip into.
Where Do I Put It?
An emergency fund should be easily accessible, which is why many people choose traditional bank savings accounts. Savings accounts typically offer modest rates of return. Certificates of Deposit may provide slightly higher returns than savings accounts, but you would face penalties if you access the CD before its maturity date, which could be several months to several years.
Some individuals turn to money market accounts for their emergency savings. Money market funds are considered low-risk securities, but they’re not backed by the federal government like CDs, so it is possible to lose money. Depending on your particular goals and the amount you have saved, some combination of lower-risk investments may be your best choice.
The only thing you can know about unexpected expenses is that they do come—for everyone. But having an emergency fund may help alleviate the stress and worry associated with a financial crisis. If your emergency savings are not where they should be, consider taking steps today to create a cushion for the future.