Protect Yourself from the Unexpected with an Emergency Fund
According to a study by Career Builder, 78 percent of full-time working Americans live paycheck-to-paycheck. A survey by Bankrate.com revealed that only 39 percent of Americans could cover a $1,000 emergency expense with money from a savings account. This leaves many Americans vulnerable to serious financial hardship if their vehicle breaks down, if they need a crucial home repair, or if they lose their source of income. Bills go unpaid, fees are charged, interest accumulates, and very quickly a difficult situation becomes impossible.
The slow and steady solution to protecting yourself from this scenario is to build an emergency fund—a savings account only used for unexpected, emergency bills. Even if money is tight and all you can save is $5 each month, saving slowly is still a better plan than crossing your fingers and hoping your car, water heater, and health work perfectly. Forever.
Start with a reasonable, reachable goal, and don’t stop. Maybe start by saving $500, then $1,000. Gradually work your way up to saving a month’s worth of take-home pay (also called net income, or the amount after taxes, child support, wage garnishment, and any other deductions). Your ultimate goal should be to save between three and nine months’ worth of income, depending on your situation
If your household has two steady incomes, aim to build your emergency fund equivalent to six months’ of monthly recurring necessities—rent, debt payments, food, utilities, transportation, etc. Leave out the non-essentials or bills that could be quickly ditched. Depending on your contractual obligations, this may include cable, Internet, gym memberships, and other personal expenses.
Here are some guidelines to help you decide what emergency savings amount fits your needs.
3 Months
Three months of take-home pay is a good emergency fund target if you:
- are currently a renter
- do not have dependents (i.e. children)
- have a steady paycheck
- have a reliable “safety net”
A “safety net” includes friends and family who could give you a place to live, a car to drive, part-time work, or some other form of help if your situation turned dire.
6 Months
This savings target applies to the largest group of people and is probably the most commonly quoted emergency fund goal. Six months’ take-home pay should be safely tucked in your savings if:
- you have kids
- you have a mortgage
- your household has two steady paychecks
Any combination of these qualifies you to join this group of savers. Single with kids and renting? Shoot to save six months’ income. Married and live in a condo? Still six months.
9 Months
If saving six months’ worth of paychecks sounds intimidating to most people, nine months may sound ludicrous. But there are situations when this is the ideal amount of money to have in case of a rainy day…or a few rainy months back to back.
If you and/or your significant other are self-employed or work freelance full time, you belong in this group. When your income is unpredictable, the bigger impact an unexpected bill can have on your life. A larger emergency fund not only helps protect your family from feeling the pinch of slow business or an unexpected bill, but it also helps protect your career. Without a sufficient emergency fund, a few slow months of work may force you to switch careers and return to a 9-to-5 job.
The most important thing to remember is that finance stability is a marathon, not a sprint. The financially savvy adopt a long-term view of savings and understand that an emergency fund is not built overnight. It takes a series of slow but sure steps. Even a few extra dollars per paycheck into an emergency savings account will add up. Set your goal and remember that all that saving is meant to benefit and protect you in the end.