Having a little cash tucked away for emergencies can provide great peace of mind. If something were to go wrong, you’d have the money there as a safety net to deal with the problem.
The question is, how much should you be saving in your emergency fund? Here, you’ll discover what an emergency fund is and how to work out how much you’ll need.
What Is an Emergency Fund?
An emergency fund is a lump sum stored within a savings account. It’s there purely to pay for any emergencies which may crop up. It could be that your car has broken down, or you need to pay emergency vet fees, or you may need to repair something in the home. An emergency fund ensures you can rectify any problems quickly, reducing stress and providing great peace of mind.
How Much Should You Be Saving?
You’ll find a lot of contradicting advice relating to how much you should be saving in an emergency fund. Many experts suggest saving at least three months of expenses. So, if all of your bills and expenses came to $1500 per month for example, you should save $4,500 towards emergencies.
To work out how much you should save, it’s also important to take into account your family’s personal situation. This includes job stability, whether you rent or own your own home, and how large your family is.
Look at your emergency fund like you would with insurance. It is an investment to protect you and your family if anything does go wrong. So, making a commitment to save as much as you can is going to ultimately protect you and the family.
The Disadvantages of Saving Too Much
While it may seem logical that the more you save in your emergency fund, the better off you will be, this isn’t always the case. Firstly, you could actually lose money by having it in a savings account. This is because you generally earn around 1% back each year on the amount you save. This doesn’t cover the inflation rises, meaning you’re losing money throughout the course of the year.
Another downside of having too much money in an emergency savings fund is that you’ll be missing out on your other financial goals. Some of the money could be put towards your retirement, or for paying off any debt that you might have.
So, it’s important to consider your current financial position before throwing all of your savings into an emergency fund. Paying off debt could be the better option – if anything were to happen, you wouldn’t have to worry about missing debt payments on top of everything else.
Having an emergency fund is essential in today’s economy. However, it’s also important to understand how much you should be saving. The above is just a general guide on the amount of money you should aim for. If you have between three and six months’ savings to cover everything, that’s all you should need in the event of an emergency.