2 Mistakes You Might Make When Calculating Your Emergency Fund This Year

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

Trying to figure out what your emergency fund should look like? Steer clear of these pitfalls. 

A recent SecureSave survey found that 67% of Americans could not cover a $400 emergency expense with money in savings. And anyone in that boat risks racking up major credit card debt when a larger unplanned bill arises.

That’s why it’s so important to have a solid emergency fund — one with enough money to cover three full months of essential expenses at a minimum. And while you might think that calculating how much money you need for your emergency fund is an easy thing to do, these two mistakes might trip you up.

1. Forgetting about inflation

Inflation has been driving living costs upward for well over a year now. And we don’t know if inflation levels will rise or fall in the coming months.

But given the way living expenses have been rising, it’s a good idea to pad your emergency fund calculations a little to account for that. If you don’t, you might end up with an inadequate amount of money in your savings account.

So, let’s say you run the numbers and determine that your monthly bills come to $2,000. Inflation might drive those costs to $2,100 next month, and $2,200 the month after. Until we’re in a more settled place with regard to inflation, it’s best to take whatever number you come up with and inflate it yourself for the purpose of determining how much you need in emergency savings.

2. Forgetting about variable interest on your outstanding debt

A big monthly expense of yours might be the minimum credit card payment you have to make. But remember, credit card interest can be variable, resulting in higher monthly payments over time. And given that the Federal Reserve seems intent on raising interest rates this year to keep battling rampant inflation, it’s fair to assume that if you have an outstanding credit card balance you’re paying off, your monthly costs might rise at some point in 2023.

Get that number just right

Three months’ worth of essential bills is really the minimum amount of savings you should be aiming for in your emergency fund. And the logic is that if you were to lose your job, it might easily take three months to find a new one.

That’s why it’s important to be spot-on with your calculations. You don’t want to work hard to sock away $6,000 in emergency savings only to still end up with debt from a period of unemployment because you really needed $6,500.

That said, if you really want to buy yourself plenty of protection in the face of a layoff or widespread recession, aim for a six-month emergency fund. That gives you a very nice cushion to fall back on if life takes an unexpected turn. And it also gives you the option to not only cover a few months of bills in the event of a layoff, but also tackle other unwanted surprises, like home or vehicle repairs, that could pop up at that very same time.

These savings accounts are FDIC insured and could earn you 13x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you 13x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2023.

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More