Do You Ever Need More Than a One-Year Emergency Fund?

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There’s one scenario where it might come in handy. 

The purpose of having an emergency fund is to ensure you’ll have a way to pay your bills in the event that you’ve lost your job. Your emergency fund could also bail you out if you’re hit with an unplanned expense, like a home or car repair. Without an emergency fund, you might be forced into instant credit card debt in these scenarios.

As a general rule, it’s important to have enough money in your savings account to cover three months of essential expenses, like your rent, auto loan, groceries, and utilities. But in the wake of the pandemic, some financial experts say that a 12-month emergency fund wouldn’t be going overboard.

Suze Orman, for example, says it’s a smart idea to have enough cash to cover a year’s worth of expenses. That way, if an extreme situation arises again like it did in 2020, you’ll have financial protection.

Now, a one-year emergency fund might seem like a lot of money. And for many people, it’s beyond what they feel compelled to save.

If you’re someone who tends to be financially cautious, though, then you may be wondering if you should be saving more than a year’s worth of bills. For the most part, you should know that you’re in really great shape if you manage to sock away 12 months’ worth of bills, and there’s probably no need to go beyond that. But there is one exception.

The rules change when you’re starting a business

Many people dream of starting a business of their own. And if you have a great idea or a passion you’ve always wanted to pursue, then you may decide to leave the safety of a salaried job and start your own venture instead.

In this situation, it’s extremely important that you have a solid emergency fund. And you may even want to save beyond a year’s worth of bills before venturing out on your own.

Most small businesses take at least two to three years to be profitable, according to FreshBooks. And if your business is going to become your sole source of income, then you may need a lot of money in savings to tide yourself over and cover your bills if it takes a long time for your business to actually start making you money.

If you’re starting a business but are also married and have a spouse who earns money, then you may be okay with a one-year emergency fund. But if you’re single and are taking this leap on your own, then it certainly wouldn’t hurt to go in with enough money in the bank to cover two years of bills, if that’s doable for you.

Strike the right balance

The problem with keeping too much money in your emergency fund is that you might lose out on the higher returns you’d get by investing it in a brokerage account. And that’s really why most people don’t need to save beyond a 12-month emergency fund. Many can even get away with less.

But if you’re starting a business, you may want to go beyond the 12-month mark in case it takes longer than expected for your venture to turn a profit. Doing so might help you dive in with fewer financial concerns. And that way, you can focus your energy on getting your business off the ground instead of wasting time worrying about how you’ll pay your bills.

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