The COVID-19 pandemic and its economic downturn might have exposed how fragile your finances are. As we continue to navigate through this tricky economic time, it’s a good time to consider building an emergency fund to help protect you in the future. Consider this information as you start to put money away.
What is an emergency fund?
At the most basic level, an emergency fund is money that’s saved specifically for people to use in times of financial distress. You might have a savings account, but if you routinely dip into it to pay bills or splurge on a big-ticket item, it’s not a true emergency fund. The money in this fund is locked away for unexpected big expenses, like home repair following a disaster, illness, or the unexpected loss of a job. It also typically refers to assets you have easy access to, like in the bank, and solutions that don’t require you to take on additional debt, such as credit cards or loans.
How much to save?
When you’re trying to calculate how much to save, there are a lot of opinions out there. That also means there’s not a good one-size-fits-all solution. Most experts agree that your emergency fund should cover several months of lost pay. Typically, three to six months of living expenses is a good goal to aim for. Since the pandemic, though, some advisors have bumped that up to eight months or a year of expenses, since that’s how long our economy was disrupted.
In the end, only you and a trusted advisor can determine what goal fits you best. If your job is in a seasonal industry or you’re a freelancer, aiming for a higher goal may be best, since there could be periods of time when you aren’t paid or work dries up. Even if your job makes saving a large lump sum of cash seem like a pipe dream, even starting out with an emergency fund of $500 is better than nothing and can help cover minor issues.
Where to start?
The first big step on your emergency savings journey is just setting your goal amount. Knowing exactly how much you want to save will help you chart your progress and keep you motivated, according to the Consumer Financial Protection Bureau. From there, reaching your goal is easier if you set up a way to ensure you make regular contributions. This could mean automatically putting money from paycheck into a savings account on payday, or charting your expenditures and putting the remaining money away.
With an emergency fund in place, it’s easier for you to weather financial difficulties if they hit you or your family. It’ll also give you peace of mind when you think about what the future might hold. Let our bankers know how we can help.