An emergency fund is hard to accumulate, but very important in your financial tool kit. After hardships due to a medical emergency or job loss, this can be a lifeline. The economic fallout from the COVID-19 pandemic highlights the need for a safety net to meet financial distress.
According to the Federal Reserve, about 40% Americans are unable to cover unexpected cash expense exceeding $400 while 40% of households with annual incomes less than $40,000 suffered job loss in March 2020. Don’t wait for an economic rebound to save money. Despite facing income disruption or financial hardships, put aside cash for an uncertain future into an emergency fund. Some tips on making your emergency fund work for you:
Why an Emergency Fund?
Many have traditional savings account paying a couple of dollars when convenient or a dedicated and earmarked fund to save for down payment or maybe a dream vacation. Your rainy day fund is a safety net for several months’ living expenses kept in a safe, accessible account for withdrawal during emergency. Some experts recommend $1,000 to begin, while others advise a year’s living expenses. Ideally, emergency savings range from 3-6 months of living expenses. Only you can judge the current amount with readjustments over time.
The Dangers of Being Unprepared
If short on cash, a single emergency adversely affects your financial health. The 2019 Federal Reserve report on U.S. household savings indicates those unable to cover an unexpected $400 expense with cash, use credit card balances or borrow money from friends / family. Habitually resorting to debt lowers your long-term financial health and results in indebtedness due to high-interest accruals, especially as credit card interest on balances exceed 16%.
Is it a Good Time to Begin Saving?
An emergency fund should grow before emergencies but the post-COVID financial crisis impacts all Americans, so save whatever possible for medical bills, essential expenses, and income losses. If six months’ living expenses is an unattainable goal now, don’t be disturbed and start small. Your goal is the destination, not a starting point. Successful saving is about habits, so focus on establishing this habit. During a crisis, work slowly towards a modest goal for a solid future footing.
Small Amounts Make a Difference
Without a stable income, set aside small amounts after expenses are met every week. Without cash inflows, even a few dollars saved, is better than nothing. Consider saving money received via stimulus check or tax refund into the emergency fund, as well. Funds diverted from discretionary spends make a big difference to your fund. It is important to get started by saving a few dollars each week, as the sum adds up over time. As per experts, those with savings from $250 to $750, are less likely to be evicted, miss housing/utility payments, or receive public benefits after job loss, health issues, or large income drops.
Bottom Line
An emergency fund is there for you in an emergency. Personalize your savings goal in your fund using budget strategies that work for your financial situation. Establishing an emergency fund for growth over time enables security during uncertain times and better prepared for any financial future. How to stash your emergency fund, determining your savings goal, and alternatives when facing hardship are important decisions.
