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Do You Have an Adequate Emergency Fund?

Life happens. As cliche as it sounds, we have all experienced the unexpected curveballs that life throws at us. What happens when one of those curveballs has a hefty bill attached? Do you have cash readily available to pay for emergencies?

Why Do You Need An Emergency Fund?

Unfortunately, most Americans don’t have an easily accessible savings account with enough cash to cushion a financial blow. In fact, nearly 60% of Americans would not be able to cover a $500-$1,000 expense. 

This is where things get dicey. If you don’t have enough to pay for the unexpected, such as a job loss, a medical bill, car repair, or home disaster, how do you come up with the money? None of the options are ideal. Some people turn to family or friends for help or cut their spending. The Transamerica Center For Retirement Studies tells us that 23% of people surveyed dipped into their retirement plan to pay for an unexpected expense. Even worse, most people put the bill on their credit card. All of these actions just put you behind financially, adding a loan payment to your budget or high-interest to pay off. 

Now that you know why you need an emergency fund, how much should you set aside for the unforeseen?

How Much Do You Need?

Sadly, there’s no cut-and-dried amount that everyone should have saved for a rainy day. Just like almost everything else regarding finances, it really depends on your unique situation. While the size of your fund will depend on the size of your family, current debt, and insurance coverage, the general rule of thumb is to have enough to cover three to six months of essential expenses. If your daily living expenses are low, your emergency fund will be less than that of someone who has a high mortgage, more mouths to feed, and lives in a city with a high cost of living. 

Additionally, if you know you have a major purchase or life milestone coming up, you may want even more in your savings to give yourself some breathing room. For example, welcoming a new baby into the family may result in medical bills and the temporary loss of income. Or, if you know your car is about to die or your dishwasher needs to be replaced, focus on putting a little more into your liquid savings ahead of time. 

If your financial situation is stable, you will need less set aside than someone whose situation is more on edge. If you are in a two-income household, where both partner’s jobs are secure, you could probably get away with three months worth of expenses saved. But if you are self-employed, work on commission, or have only been at your current job for a short amount of time, you should lean more towards six months worth of expenses in your emergency fund. 

If you have an idea of how much you need to save but don’t know where to find those extra dollars, here are some ideas. 

Where To Begin

There are so many things to save for, on top of all the bills you need to pay. You know you should be maximizing your 401(k) and IRA. You want to put as much as possible toward a 529 college fund for your kids or grandkids. Now you need to find more excess cash to build an emergency fund. The good news is that every little bit will provide a buffer for future crises. 

By saving an additional 5%, someone earning $40,000 a year can save $2,000 towards emergencies. You’d be surprised at how lowering your spending on non-essentials can help you come up with the extra savings. Even better, any time you come into unexpected money, put some towards your emergency fund. This could be from a tax refund, a bonus at work, gifts from relatives, or a salary increase. 

Remember that an emergency fund is not an investment. Find a good money market or savings account that will keep your money liquid and safe from risk. You will not regret having an emergency fund. Everyone needs money for the unexpected, so instead of losing sleep every time your car makes a strange sound or a windstorm damages your house, rest easy knowing that you’ve worked hard to mitigate the damage to your budget. It’s better to have an emergency fund and never need it than not to have one and desperately need it. If you would like to discuss your particular situation to get an idea of how an emergency fund would provide you with peace of mind, give me a call at (717) 283-4186 or email me at dniggel@keywealthpartners.com.

About David

David Niggel, CFP®, ChFC®, AIF® is the founder and president of Key Wealth Partners, LLC, an independent wealth management firm serving individuals, families, and business owners. Along with over a decade of financial services experience, he has advanced knowledge and training in providing holistic financial planning with fiduciary and ethical care, holding the CERTIFIED FINANCIAL PLANNER™, Chartered Financial Consultant®, and Accredited Investment Fiduciary® certifications. With hands-on entrepreneurial experience, he has the unique ability to help clients meet both their individual and business goals. Based in Lancaster, he serves clients through the York, Harrisburg, Hershey, and Central, Pennsylvania areas. Learn more by visiting www.keywealthpartners.com or connecting with David on LinkedIn