When life hits you with a big unexpected expense, your emergency fund ensures you’re financially prepared. Most financial experts agree that an emergency fund is a crucial part of financial planning. However, less than half of Americans would be able to cover a $1,000 emergency with savings.
The big questions most people ask are how much should my emergency fund be, how much should be in it, and what should it cover? Here’s our advice on how you can start.
Setting Your Emergency Fund Goal
The first step is to set your emergency fund goal. You can still start even if money is tight, but it will take more time. Here’s how you can start building your emergency fund today.
1. Determine how much you want to save. This depends upon your income and your necessary monthly expenses.
2. Set your monthly savings goal. How much can you afford to set aside from each paycheck? If you only make enough to cover necessary expenses, consider a side gig to start saving.
3. Set a household budget. This is the best way to make sure you’re sticking to your plan and putting money aside.
4. Auto-deposit a set amount from your paychecks into a separate bank account. This way, you won’t have to think about it.
How Much Should My Emergency Fund Be?
The most asked question is. “How much should my emergency fund be?” This varies by person. Most experts agree that there should be between three and six months’ worth of living expenses saved, but this depends on your situation.
The more stable your income and your household expenses, the less you need in your emergency fund. If you’re self-employed, the only one working in the household, or if someone in your house suffers from a chronic medical condition, it’s better to have six months or more of living expenses saved. The more prepared you are, the better!
What Should My Emergency Fund Cover?
So what should your emergency fund cover? Here are common living expenses.
Housing: You don’t have a choice when it comes to paying for the roof over your head. This is your monthly rent or mortgage payment.
Utilities: This includes water, gas, electricity, and waste. Be aware that these aren’t stable monthly amounts and fluctuate throughout the year. There are also many ways to cut back on energy consumption to save on bills.
Phone and internet: While a phone might be necessary, you can call your cellular service provider to see if there’s a cheaper data plan. Unless you work from home, your emergency fund doesn’t need to cover your internet.
Insurance: Auto, home, and health insurance costs are necessities.
Transportation: Monthly transportation expenses include car payments, public transportation costs, and gas.
Debt payments: Your emergency fund needs to cover your minimum monthly payments on debts. Don’t delay paying these, as it could mean paying late fees and extra interest.
Food: According to the Bureau of Labor Statistics, the average American spends $7,923 on food each year but nearly half of that was on dining out in 2019. Although food is a necessity, it’s easy to cut back on your grocery expenses by using a household budget.
Start Saving for Your Emergency Fund
For many people, debt is a big issue. What happens when you can’t afford an emergency expense? Many people turn to credit cards to pay it off over time, creating even more debt. Even if you’re living paycheck to paycheck and you only make enough for living expenses, there are ways to cut your spending or bring in extra cash with a side gig.
How much should my emergency fund be? It depends upon your situation. Start crunching some numbers and setting some cash aside.