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What's the Right Amount for Your Emergency Fund?

A young man looks under the hood of his car while making a call on his cellphone
07.29.21
By: American Heritage

Everyone knows that saving money is essential if you want to build a financially secure future. But having a general savings account may not be enough to help you get through those lean times (such as losing a job) or to cover a surprise bill (such as medical expenses or car repairs).

You need to develop a solid emergency savings fund if you want to keep your finances in good shape.

Saving for emergencies when times are good can help ensure that you’re prepared for unexpected costs whenever they pop up. That means you won’t have to rely on high-interest credit cards or scramble to apply for personal loans, or put off other financial responsibilities to help make ends meet.

 

How Much Do You Really Need to Save?

These are the most common suggestions:

 

  • The Three-Month Rule: Many people recommend that you have the equivalent of at least three months of living expenses saved up in your emergency fund. This way, you’ll have enough money to cover food, rent, utilities, recurring debt payments, and any normal expenses should you lose your job or be unable to work for a period of time.
  • The $2,500 Rule: If saving the full three months’ worth of living expenses is too much for your budget, you may be able to make do with less. Some experts suggest that $2,500 is enough to take much of the burden off your shoulders and keep you from falling into financial trouble if you run into an emergency.

Keep in mind that $2,500 is really only meant to be a buffer. It may not be enough to cover all your bills or let you avoid relying on credit cards to make ends meet.

 

How to Figure Out What’s Right for You

Start by taking a look at your average monthly expenses, which are based on your lifestyle and the needs of your family. Common monthly expenses include:

 

  • Rent/mortgage payments
  • Insurance premiums and out-of-pocket medical costs
  • Food
  • Utilities
  • Recurring debts like credit cards and car payments
  • Childcare costs

Add those costs up and see how much you spend in a given month. If you’re aiming to save three months of living expenses, multiply that number by three. This is your savings goal. If you’re aiming for an emergency fund of $2,500, use this number to motivate you to get closer to that goal. As your lifestyle changes, you may need to adjust your emergency savings amount to better reflect your expenses.

 

Make Emergency Savings Part of Your Budget

Every effective budget includes a savings category, earmarking a certain amount to be tucked away for the future. Most people put those funds in a general savings account. But if you’re working to build up a separate emergency fund, it’s a good idea to break your savings contributions into two parts.

Allocate a set amount of your monthly savings amount into your general savings and put the remainder toward your emergency savings. You may find it easier to do this if you have two savings accounts – one for general savings and one specifically for emergencies. Once you reach your emergency savings goal, you can add more money to your general savings fund.

Reminder: If you ever need to tap your emergency fund, be sure to replenish it as soon as possible.

 

Save Your Extra Cash

If you’re struggling to save money each month and already make do with a tight budget, don’t give up the idea of building your emergency fund amount. Instead, get creative. If you have an unexpected windfall, like receiving money as a gift or getting a bonus at work, add it to your emergency fund.

 

Can Your Emergency Fund Be Too Large?

It might seem counterintuitive, but it is possible to save too much for emergencies alone. Your emergency fund just needs to be large enough to help you cover expenses for a set period of time. Once your emergency fund is set, you should continue to add money to long-term savings options like a retirement account with a higher rate of return or use available funds to pay off debt.

The key is to remember that you have other things to save for. Your emergency fund doesn’t have to last forever.

 

Need Help Setting up a Savings Plan?

The best way to start your emergency savings fund is to open a dedicated savings or money market account to keep your money safe and readily available. But once you have that account, you’ll need to create a savings plan and strategy to help you reach your goals. Check out our AmericanHeritageU and get the advice you need to build your savings the smart way.

 

 

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