Emergency Fund: How Much to Save and How to Be Prepared
September 11, 2023 Author: Tess Downing, MBA, CFP®, Complete View Financial
With the unpredictable factors of the world, it’s essential to be prepared for the unexpected. Especially after COVID-19, consumers prioritize emergency funds and savings to be ready for unforeseen events. So, how do you set up your emergency fund to be thoroughly equipped for unexpected changes?
First, your emergency fund needs to be liquid. You must be able to access these funds in a quick amount of time in case of an emergency. This means that, even though the returns are lower, you should keep your emergency fund money in a savings account, a particular checking account, or another account that allows immediate withdrawal.
Examining your Emergency Fund
Typically, a reasonable basis for an emergency fund is 3-6 months' worth of your expenses, this includes rent, car payments, mortgage, and house payments. Business owners should cover the costs when calculating the amount to set aside in an emergency fund. If you are a single-income household, you should set aside more because an unexpected event could impact you more than a two-income household.
Another essential factor to take into account is your insurance. Depending on your insurance type and coverage, you may have to save more or less than the 3-6 month expense average. You should aim to be able to cover your deductible with the amount of savings in your emergency fund and any expenses.
When to Start Saving
The answer to this is now. The earlier you start, the less you must save at once. If you are young and just starting, the idea of saving up 3-6 months' worth of expenses is overwhelming. Start by saving a little until you can grow the amount when you earn a raise or promotion.
Make sure that you reserve your emergency fund SOLELY for emergencies. Do not use this money to save for college or pay off debts. Having this money reserved for only emergencies is essential to be fully prepared.
You may need to access this emergency fund at some point. It is better to be prepared than to struggle when the time comes. Set aside money and give yourself financial confidence during unexpected times.