According to a July 2021 Bankrate study, 25% of Americans surveyed have no emergency fund.
An emergency fund acts as a buffer that you can use without relying on credit cards or high-interest loans in the event of an unexpected expense or life event. If there is anything that the last 2 years have taught us, we should plan for the unexpected. People have been faced with job loss, medical expenses, and major life events.
A good rule of thumb is to have 3-6 months’ worth of living expenses saved. If you are not sure how much that should be, set up a basic budget and list your essential expenses such as housing, food, insurance, utilities, and debt payments. This should include anything that you couldn’t reasonably cut from your budget for a period of time. You don’t need to include non-essential items that you could cut out such as vacation or entertainment spending.
Pay yourself first. Make savings a regular expense, just like your mortgage or grocery bill. Target a monthly savings goal and then set up automatic withdrawals from your checking account or a direct deposit from your paycheck. Saving your tax refund or a bonus can give your emergency fund a boost too if it’s needed.
Having a separate account for this is also a good idea so that you aren’t tempted to tap into it for everyday expenses. We suggest that you maintain a portion of the funds in a liquid and risk-averse vehicle, such as a savings account or money market fund. You want to be able to access the funds quickly. The other portion could then be invested conservatively.
~ Jennifer Baham