You have some savings set aside in an emergency fund so that you can handle urgent expenses without disrupting your budget. It’s good that you’ve set up this savings fund, but is it big enough?
Why Do You Need an Emergency Fund?
Without an emergency fund, you will have limited options for managing an urgent expense. You could use funds from your checking account and risk disrupting your budget for the month. This could make you come up short on bills, collect late fees, overdraft an account or bounce checks. It’s not an ideal situation to be in.
Instead of risking your financial stability in the immediate future, you have two options that allow you to cover the expense quickly and then focus on repayments later. You can use your credit card, or you can try to apply for an online loan. When applying for online loans, make sure they’re available in your home state. So, if you live in Fort Wayne or Bloomington, you’ll want to look for online loans in Indiana when you need help with an emergency expense. Don’t waste your time filling out applications for loans that you can’t access in your state.
How Big Should It Be?
If you only want to use it to handle small, emergency expenses like car repairs and home repairs, having $1000 to $2000 inside your fund is a good goal to reach for. That should be a substantial amount that you can use for these types of costs.
If you want to use your emergency fund for bigger problems, you’ll need to save up more. A good goal to aspire to is between three to six months’ worth of your income.
Why So Much?
You can use your emergency fund as a financial safety net when something goes wrong, and you can’t rely on your regular source of income to keep you afloat. These are some examples of when it would come in handy:
- You unexpectedly lose your job
- Your work hours are drastically cut without warning
- You need to act as a caregiver for an elderly relative
- Your childcare options fall through, and you need to take time off to watch your children
- You fall ill and can’t work
- Your loved one falls ill and needs assistance/support
- Your loved one passes away, and you need time to grieve and settle their estate
The COVID-19 pandemic has shown that these difficult circumstances can happen at a moment’s notice. Millions of Americans lost their jobs unexpectedly and had no replacement options lined up. Schools and daycares closed, making parents sacrifice their jobs in order to care for their young children. They had to take care of relatives who caught the virus, or they caught it themselves and needed time to recover.
Having three to six months’ worth of income stashed away will help you cover essential expenses when your income sources dwindle or disappear. It will also afford you some time to look for other supports if these circumstances look like they won’t end any time soon, like unemployment benefits, insurance claims, etc.
Should You Save Even More?
Going above three to six months’ worth of income isn’t exactly necessary. That money could be directed towards other goals that can protect you in emergencies, like getting better insurance coverage or paying down your debts.
Now you know how much you should have sitting in your emergency fund. If it’s on the empty side, it’s time to take the initiative to bulk it up. You never know when you’ll need to use those savings.