Stacking cash — How much should you save and where?
How much do you need tucked away in an emergency fund?
No matter if you call it an emergency fund, cash reserve or just savings, we all need extra money set aside to stay safe from the unexpected.
Not having enough cash to pay for an emergency is why many people get into financial trouble in the first place. In fact, just 55% of American adults say they have an emergency fund, according to Finder’s Consumer Confidence Index.
Who needs an emergency fund?
Emergency funds are a financial safety net that keeps you from relying on debt and also gives you peace of mind. Whether it’s a car that won’t start, medical bills or a loss of income, having a financial cushion to fall back on is something you need. Otherwise, you’ll have to make serious sacrifices or rack up expensive credit card debt.
In general, it’s best to keep emergency savings in an FDIC-insured, high-interest savings account. Savings accounts are the top choice for most people, with 54% reporting that this is where they hold their emergency funds, followed by 17% who say they keep their funds in either a checking account or cash.
Having your emergency fund in a savings account is a smart choice because emergencies can’t wait for a CD or bond to mature or for you to sell a valuable asset or home to raise needed cash. They can happen in a split second, so you need funds where you can immediately tap it.
While investing the money means you could get higher returns than a bank account, it also means your emergency money is subject to volatility and could plummet in value right before you need it.
Cash in a bank savings or money market account means it’s safe no matter what happens in the markets. The purpose of emergency funds isn’t to grow but to be your safety net during a hardship.
How much emergency money should you have?
To calculate the right amount of emergency savings, tally up your living expenses, such as housing, groceries, healthcare, transportation and existing loan payments. A good rule of thumb is to maintain a minimum of three to six months’ worth of your living expenses in your emergency fund.
For instance, if your essential cost of living is $4,000 monthly, aim to keep at least $12,000 ($4,000 x 3 months) in the bank. However, having a six-month reserve or more could be appropriate based on your family size, financial obligations and job stability.
Should you keep emergency money at home?
You might wonder if keeping cash at home is wise. There’s nothing wrong with keeping a small amount of emergency money in a safe place at home in case of a disaster or widespread power outages.
However, most homeowners and renters insurance doesn’t cover cash. So, if your money gets stolen, lost or destroyed in a fire or storm, you can’t get it back.
How do you build an emergency fund?
If you haven’t started an emergency fund, accumulating several months’ worth of living expenses could take years, depending on your income and financial situation. Start by calculating your monthly living expenses, estimating how long you could need your emergency money and automating your savings.
Ask your employer to split your paychecks between a checking and emergency savings account. If you’re self-employed, set up an automatic monthly or weekly transfer from your checking into your emergency fund.
Consider opening a separate high-yield account to keep your emergency money separate from your regular savings. That could reduce any temptation to spend it on non-emergencies.
Starting small, perhaps intending to save $500 by a set date, is better than never starting. Once you see your emergency fund balance growing, you’ll know that you’re prepared to tackle just about anything that happens in your financial life.
About the Author
Laura Adams is a money expert and spokesperson for Finder. She’s one of the nation’s leading personal finance and business authorities. As an award-winning author and host of the top-rated Money Girl podcast since 2008, millions of readers, listeners, and loyal fans benefit from her practical advice. Laura is a trusted source for media and has been featured on most major news outlets, including ABC, Bloomberg, CBS, Consumer Reports, Forbes, Fortune, FOX, Money, MSN, NBC, NPR, NY Times, USA Today, US News, Wall Street Journal, Washington Post, and more. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Her mission is to empower consumers to live healthy and rich lives by making the most of what they have, planning for the future, and making smart money decisions every day.
This article originally appeared on Finder.com and was syndicated by MediaFeed.org.
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