It is scary to think, but almost half of Americans have no emergency savings. They can’t cover an unexpected $400 bill without having to sell something or borrow the money. Living so close to the edge sounds incredibly stressful. A person in this situation is at the mercy of circumstances beyond their control, such as a layoff or a sudden increase in fuel prices. Having emergency savings helps reduce the stress associated with living paycheck to paycheck.
What is an emergency fund? An emergency fund is just that; for emergencies only. It is cash on hand, which you only use for unexpected expenses. This fund is separate from savings for a big anticipated purchase, such as a wedding, a home, or a vacation. This fund has to be liquid, i.e. readily accessible if needed, so the best place to put the money is within a savings account.
Keep three to six months of savings in an emergency fund
How much savings should I have in an emergency fund? This varies based upon your personal situation, but a general rule is three to six months of expenses. The higher your level of job security and income consistency, the closer to three months you can be. Someone working in a permanent government civil service position is less likely to experience a sudden loss in income than someone in a commissioned-based sales position.
Why not save more than six months in an emergency fund? An emergency fund should be held in a savings account, which does not provide good investment returns. Beyond having six months of expenses in cash savings, you are better served to invest your money in something with a higher rate of return. Holding on to too much cash is passing on the opportunity to have your money work for you.
How do I build an emergency fund if I currently have no savings? The short answer is slowly. If you currently have no savings, the idea of saving three to six months of expenses is probably just as stressful as living paycheck to paycheck is. Savings take time, so don’t try to do it all at once. One option is to make a slight lifestyle change, such as giving up a daily cup of store-bought coffee, and directing that money towards your developing emergency fund. Another option to build an emergency fund is to earn more income through a side hustle.
It feels good to have savings
What does it feel like to have three to six months of expenses in savings? It feels really good! It is comforting to know you can suddenly lose your source of income and still be able to cover your expenses while you regroup. There is nothing more stressful than being a wage slave. It is empowering to be capable of resigning from a toxic work environment.
An emergency fund feels like a warm blanket on a cold day. It is never too late to start developing an emergency fund. With patience, discipline, and time you can build your emergency fund and then move on to more advanced levels of investing.