3 things to do with your emergency savings to prepare for an emergency
- Financial planners say that three to six months of spending is up to a good emergency savings goal.
- But, if you’re self-employed or in a high-turnover job, consider saving up to a year in expenses.
- To save quickly, put the child tax credit and suspended student loan payments in your emergency fund.
- Read more stories from Personal Finance Insider.
When the pandemic hit in March 2020, I felt a sense of panic take hold in my life. I was terrified of getting sick, scared of losing clients and my business (in the wedding industry), and nervous about the unknown state of the world.
One of the things that made me breathe a little easier was knowing that I had a decent amount of money in my emergency savings account. After being laid off from my full-time job in 2015 and officially released on my own as a solopreneur, having an emergency fund was a necessity. I knew I needed to have some cash in reserve that could be used for big life challenges, business issues, or unforeseen expenses. I started putting $ 100 per month into this emergency fund and increased it over time as much as I could.
Experts advise single earners to save at least six months of spending, and those living in two-earner families to save at least three months of spending. However, after the pandemic caused people to dip into their emergency funds (or savings accounts in general), I began to wonder if financial experts would recommend putting even more into those funds.
Here’s what financial experts shared when I asked them if people should increase their emergency fund amount in the event of a new pandemic or an emergency.
1. The amount you save is personal
When it comes to how much to have in your emergency fund, a person should make that decision based on the state of their finances.
Jason Dall’Acqua, a financial planner, says your emergency fund balance should be based on your specific situation and your tolerance for risk.
“A general rule of thumb is to keep three to six months of living expenses in an emergency fund, but that’s just a general guideline,” explains Dall’Acqua. “If you have very high job security you may not need a large emergency fund balance, but if you are in a position with a high turnover rate or are a self-employed, it may be a good idea to have a larger emergency fund, such as a year of living expenses.
2. Save too much money, it does exist
When planning how much money to put in your emergency savings account, Dall’Acqua says it might not be good to have too much money in that account.
“Be careful not to have too much money in your emergency fund. This money can give you peace of mind knowing that you have a great safety net in case of financial hardship, but there is also an opportunity cost to having too much money, ”says Dall’Acqua. “Money in the bank doesn’t even keep pace with inflation given the current low interest rate environment. As a result, your emergency fund loses value over time.”
Instead, keep the money in a taxable brokerage account where it can grow over time while still remaining liquid in case you need it to cover an emergency expense.
3. Take into account any stimuli you have received.
If your emergency fund was depleted during the pandemic, Dall’Acqua says maybe you should take advantage of the stimulus programs in place.
“For example, if you have federal student loans and have suspended payments, which have just been extended until January 2022, consider transferring those monthly savings to your emergency fund to replenish that balance. have children and you have started receiving the Child Tax Credit advance in monthly installments, then direct this additional income to your emergency fund, ”says Dall’Acqua.