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There’s a solution that doesn’t involve losing sleep night after night.
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At a time when inflation is costing Americans so much money, the idea of coming up with extra money is throwing a lot of people for a loop. In fact, a good 85% of U.S. consumers say they’re worried about the possibility of facing unplanned or unknown expenses, according to the latest BMO Real Financial Progress Index.
If you feel the same way, there’s one very important goal you should commit to in 2023. It could not only help ease your mind, but also, spare you from landing in costly debt when unexpected bills pop up.
You absolutely need an emergency fund
You’ll often hear that it’s important to have money in savings for unplanned expenses. But you may not feel the push to build cash reserves until you’re actually looking at a situation where you need money but don’t have any.
You really don’t want to let things get to that point. A much better bet is to do your best to build up a solid emergency fund. What that means, however, depends on your personal circumstances.
What should your emergency fund look like?
Financial experts differ on how much money you need in a savings account for emergency fund purposes. Some will say you’re okay with three to six months’ worth of living expenses. Others will say that nine to 12 months’ worth of bills is more appropriate.
A number of financial experts changed their emergency fund guidelines after the COVID-19 pandemic hit and spurred a massive unemployment crisis. We saw back in 2020 that many people lost their jobs overnight and couldn’t find work again for many months. And while there was lots of stimulus aid available at the time to help people get through that crisis, we can’t assume stimulus checks will come to the rescue if a future economic downturn comes to be.
That’s why it’s certainly not a bad idea to aim for nine to 12 months of living costs in the bank. But if that seems overwhelmingly daunting, start with a smaller emergency fund goal and work your way up.
Meanwhile, to see how much money your emergency fund needs, calculate your essential monthly bills. These might include things like:
Rent or mortgage paymentsAuto loan paymentsTransportation costs like gas and auto insuranceFoodMedicationsUtilitiesCellphone service (these days, this is more of a need than a want)
Once you figure out how much you spend monthly on essentials, you can multiply that total by three to get your minimum emergency fund balance. You can also try an emergency fund calculator (you’ll still need all the numbers for what you spend). And once you’ve met that goal, you can continue to aim higher if you want more financial protection.
Don’t leave things to chance
You never know when an unplanned bill might land in your lap, or when you might lose your job and need your savings to fall back on to pay your bills. Having money in the bank for emergencies could make it so you’re not instantly plunged into debt when things don’t go your way. And that, in turn, should make it a lot easier for you to recover from whatever financial crisis has arisen, whether it’s a period of unemployment, a major home repair, or a medical issue that not only sidelines you, but leaves you with lots of bills to pay.
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