Building Your Safety Net: Essential Tips for Your Emergency Fund

A recent Market Watch article surveyed Americans on how they are feeling about the current economy and their personal financial situation. What they discovered is “48.6% of Americans consider themselves to be “broke,” and 66.2% feel they are ‘living paycheck to paycheck.’” In a high inflation market environment and total household debt topping $17 trillion dollars, it is reasonable to see how people are feeling insecure and discouraged with their financial circumstances.

Although an Emergency Fund is a household essential in all scenarios, it may be a vital strategy for Americans in this season. So what is an Emergency Fund? How much emergency funds do I need? What are emergency funds intended for? Let’s dig in.

 The Consumer Financial Protection Bureau defines an emergency fund as:

“…a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, home repairs, medical bills, or a loss of income.

In general, emergency savings can be used for large or small unplanned bills or payments that are not part of your routine monthly expenses and spending.”

 A date night in downtown Saratoga, a trip down to Florida to see a friend, or a quick latte may be an unplanned expense, but they do not fall into the “emergency fund” category.

As mentioned earlier, these expenses are unexpected, urgent, not routine, and essential. A leaky roof cannot wait around for you to save up to pay for fixing it and your car’s transmission won’t be so forgiving if you are trying to get to work. Emergency financial situations are stressful to begin with, but having a emergency cash reserve allows you to weather the storm without incurring a new debt.

 A general rule of thumb for saving up emergency funds is 3 to 6 months of living expenses. This will vary from person to person, family to family, and will depend on such factors as how many people the budget is supporting and how costly your essential living expenses are.

 For a single person spending $2,500 a month and renting, $7,500 to $15,000 may feel more than adequate for their lifestyle. For a couple with only one spouse working and multiple children and spending $5,000 a month, the three month calculation of $15,000 in emergency funds may feel light if they plan to protect against the loss of income in a tough season. Each family will need to decide what sort of emergency fund would allow them to account for multiple financial emergencies happening in a season.

 When funding your emergency fund, choose a strategy that will make sure you are keeping the emergency fund funded up to your desired goal, as well as creating boundaries to not spend those funds for non-emergency expenses. It may be wise to consider an outside high yield savings account that is FDIC insured up to $250,000, easy to funnel funds to directly from your paycheck or personal checking and keeps funds accessible to bring back to your checking for pay for emergencies within a day or two. The current high yield savings interest rates are providing significantly higher interest rates compared to a traditional checking account.

 If 3 to 6 months of expenses feels daunting to you, take one step at a time. Save up that first $1,000 and keep the savings coming week by week and month by month. It could make sense to set aside a fixed amount each pay period. If you happen to have a season where you have a windfall of income, such as an unexpected tax return surplus or bonus, these are great ways to boost your emergency fund more meaningfully without disturbing your monthly budget.

 Some of us may already have quite a bit of cash stored up for a rainy day, while for others, this can seem like a daunting task. Remember, the best time to plant a tree was 20 years ago, the second-best time to plant a tree is today. If you have not started to save up for an emergency fund, the best time to start is today!

 We all have unique financial situations and circumstances, so it may be a good idea to reach out to your financial advisor to ask them how to best build out your emergency fund. A wise investor knows how to play offense and defense, start saving for your emergency fund today.