Financial planners, advisors and retirement planning professionals all consistently agree on one point – you should have at least some emergency cash set aside for any unforeseen situations that might arise. If you’re trying to budget and plan your finances, it’s important to consider how much of an emergency fund you should have.
What is Emergency Cash?
Emergency cash is a term used to refer to money held in reserves in case of an unexpected crisis or event. Usually, it is a separate fund held in a savings or checking account. This money is typically used to cover unexpected or unplanned expenses. It’s not meant to be used for everyday purchases or savings goals.If you experience an unplanned event like a job loss, medical emergency, or car repair, your emergency cash fund can provide the financial support you need.
Why is Emergency Cash Important?
It’s always prudent to plan ahead in case of unexpected expenses. The last thing you want to do is dip into your retirement savings or take on more debt to cover unanticipated costs. An emergency cash fund is a common-sense way to responsibly manage your finances and reduce both the financial and emotional impact of a surprise expense.
How Much Emergency Cash Should I Have?
There is no magic number for a recommended emergency fund as it depends on a variety of factors, including your income, bills, and lifestyle. As a general rule of thumb, financial advisors recommend having an emergency fund equal to three to six months of your essential expenses. This can include costs like rent, groceries, utilities, medical bills and transportation.
Remember, this isn’t the amount that you must have to cover all costs related to your lifestyle, but rather the amount of money that it would take to cover the expenses that are necessary to maintain basic living conditions.
If You’re Just Starting to Save
If you don’t have any emergency cash yet, start small. The idea is to create a habit of saving. Make a plan to set aside some money each month towards your emergency fund. Open a savings account that’s separate from your regular checking account, so you won’t be tempted to use it. You can also set up automatic transfers each month, so the money is put away before you have the chance to spend it.
Keep in mind that having an emergency cash fund should not discourage you from investing for your future. Try to achieve a balance between saving and investing, so you can get the most out of your financial plan.
The Benefits of Having an Emergency Fund
Having an emergency cash fund acts as a financial cushion in case of any unexpected crisis. Some of the main benefits of emergency cash include:
• Allows you to “weather the storm” during a financial emergency
- Gives you peace of mind knowing that you have access to money in a pinch
- Reduces your reliance on other forms of debt such as credit cards
- Helps you avoid tapping into retirement savings if possible
- Offers a sense of financial stability and security
Where to Put Your Emergency Cash
When setting up your emergency cash fund, consider your own financial security and interests. At the minimum, seek out savings accounts that are FDIC-insured, meaning that up to $250,000 of the total balance in an account at an FDIC-insured bank is protected. This can provide an extra layer of protection for you if the bank were to fail.
You may also have other needs, like earning a higher rate of interest as your balance grows. Consider how quickly you may need to access the funds, and whether or not you’ll need to pay taxes on the earnings. Speak with a personal banker to determine the best option for your emergency cash fund, and create a plan to grow the savings.
An emergency cash fund is a necessity in managing your finances, as well as providing peace of mind in case of any unexpected crisis or event. It’s important to understand how much emergency cash you should keep set aside, the benefits of having an emergency fund, and the best places to store your money. Building an emergency cash fund shows you are taking charge of your financial future and health. Carve out some time and set a savings goal for yourself, as creating an emergency fund should be an integral part of any financial plan.