Here’s How To Determine The Size Of Your Emergency Fund
COVID-19 revealed that life is not always predictable. Sometimes things get totally out of the box and the unimaginable thing happens. Although there are always things beyond your control, having an emergency fund available to help you get through most events can reduce a lot of stress when things go wrong. You need to take some time to determine just how much you should set aside for your emergency fund.
Start
If money does not come easy in your household, starting to save money is very important. Start working toward getting $500 in the bank. Then aim for $1,000. Because medical costs, car repairs, and living expenses can be high, having $1,000 in the bank should only be considered a starting place. A prolonged problem will usually require having a much larger sum in the bank.
The Goal
Once you have reached $1,000, try to save three to six months’ worth of expenses. Then, go one step further, if possible, and try to get one year’s worth of expenses put away.
Finding money to put into an emergency fund is easier if you create a budget. Then, watch all of your expenditures and avoid spending money on frivolous things or things you do not need.
The Money You Need for Emergencies
When deciding on how much you need in savings, you need to consider several factors. Things like whether you own or rent your home, how many are in your family, the stability of your job, your current monthly bills, and your vehicle costs.
Some things in your circumstances may lower your need for cash in an emergency. If your home is destroyed, for instance, and you have a good homeowner’s policy, it will likely pay for you to relocate temporarily and cover reasonable expenses. Remember, though, that it may take a little while to get cash from the insurer. Or, if you can go to a relative’s home, then you do not need to save for rent or hotel money – unless you want to.
Earn Interest on Your Money
Instead of just saving your money in a jar, let it earn some interest for you. A simple savings account is fine in most cases. While your money will probably only earn about one percent interest per year, it will be easily accessible – which is the main point of having an emergency fund.
Access to Emergency Funds
A key feature of having an emergency fund is that you need to be able to get quick access to the cash. It should not be tucked away into some kind of account that makes it inaccessible. At the same time, you may only need to put about one month’s worth of the fund into a savings account. During the month after your emergency, you could access your money from other types of accounts, which will enable you to earn greater interest on the majority of your emergency fund money.
Avoid Saving Too Much
Emergency funds are useful when they are accessible, but you want to avoid putting too much money into it. Once you have a good amount in it, you also want to save for other things in life. Although not as easily accessible, money placed into other types of accounts such as stocks, mutual funds, ETFs, etc., will earn interest at a considerably higher rate. Oftentimes, you can also choose your risk level, enabling you to feel more comfortable with how your money is invested.