The COVID-19 pandemic taught everyone a crucial lesson — it's essential to be prepared for financial curveballs. One of the best strategies to accomplish this is by regularly putting money aside into an emergency fund.
Ideally, you’ll want to keep your emergency fund separate from your everyday savings and only use it for unexpected expenses, such as:
- Appliance repairs
- Home repairs
- Auto repairs
- Job loss
- Medical expenses
An emergency fund can definitely help you when you're facing unexpected expenses. However, it can be challenging to know exactly how much you need to save.
A Good Rule of Thumb
A good benchmark to aim for is around three to six months’ worth of living expenses. However, in certain situations, you might want to save up to 12 months if you can.
But what exactly does that mean?
Let's take an example of three to six months of living expenses. Review your account statements for several months to get a better idea of your recurring expenses.
Make a list of all major recurring monthly expenses like:
- Utilities $300
- Rent or Mortgage $1,500
- Auto Payments $250
- Gasoline for the car $75
- Credit card payments $50
- Groceries $350
In this example, your total major monthly expenses would be $2,525. Now, you'll want to multiply those monthly expenses by three (or six) to receive the amount of your ideal emergency fund. So, for three months, your goal will be $7,575; six months: $15,150, and so on.
Of course, this will be a substantial amount of money that you might debate putting into higher-earning investments, such as the stock market. However, the purpose of your emergency fund is to have immediate access to your money, which will be limited with market-invested funds. Alternatively, a money market account allows you to earn higher dividends but still provides instant access to your funds, if needed.
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I Can’t Save That Much!
When initially calculating your ideal emergency fund amount, the figure can seem a bit overwhelming. The trick is to start small and work your way up toward your goal. For example, first, you'll begin by saving up $250. Then you'll move on to $500, then $1,000, etc. As you continue moving up, you will gain confidence and realize you can save — and this will motivate you to continue saving.
If reaching your goal becomes too challenging, don't get flustered. Keep in mind, you don't need to have all of the money right away. Your emergency fund is an ongoing process, like a retirement account, for instance. Once you reach your goal, you can start using the extra money you have coming in each month towards other goals, such as investing in the stock market.
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Keep Your Money Safe
You should keep your emergency fund strictly for financial emergencies and unexpected expenses. Therefore, it’s best to keep this money separate from your traditional savings and spending accounts. Doing so will also help limit your temptations to spend this money frivolously.
We’re Here to Help!
Growing your emergency fund doesn’t have to be complicated. It will take some commitment and planning, but you can quickly grow your savings if you’re consistent. Tools, such as direct deposit and payroll deduction, are available to help you automate your savings and make the process even easier.
Please stop by any of our convenient branch locations or call (409) 899-3430 to learn more about how we can help boost your emergency savings.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.
