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Increasing your emergency savings this year could be a smart decision. Read on to see how you can tell if you need a bigger emergency fund.
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Having emergency money set aside in a high-yield savings account is really important. Without a financial cushion, any unexpected expenses could send you reaching for the credit cards. And unexpected expenses are inevitable in life, with as many as 60% of Americans reporting experiencing an unexpected financial shock over the course of a year.
One big question you may have, though, is how to tell if you have enough set aside. Specifically, you may be wondering if you should increase your emergency savings in 2024. If you’re trying to figure that out, here are two questions to answer.
Do you have a lot of high-interest debt?
If you owe a lot of money to creditors, you should have some emergency savings even if it may seem as if you should be concentrating on debt payoff first.
While it may seem crazy to stick money in a savings account if you’re paying upward of 20% interest on a credit card, the reality is that you don’t want to just send every dollar to your card and leave yourself with no cash cushion for emergencies. If you do that, any small setback will send you right back into debt and you’ll be trapped in a terrible cycle.
Instead, save a small emergency fund of around $500 or $1,000, and then focus on debt payoff. If you already have that much saved, then you shouldn’t increase your emergency savings and should instead get serious about paying down your credit cards.
After you’ve gotten rid of high-interest debt (typically defined as debt with financing charges of 10% to 15% or more), then you can work on increasing the amount you have saved for a rainy day.
Do you have three to six months of living expenses saved?
As a general rule of thumb, it is a good idea to have about three to six months of living expenses put aside for emergencies. Many people don’t, however, since 63% of workers can’t pay a $500 unexpected expense (according to data from SecureSave).
If you don’t have high-interest debt and you are short the recommended amount for an emergency fund, you should increase the amount you’re saving for a rainy day this year. There’s a good reason for this recommendation: You don’t want an interruption in income to cause you to become unable to pay important bills so you find yourself facing repossession, foreclosure, or damaged credit.
Research from LinkedIn found that it could take about six weeks for entry-level workers to find a new job, and about seven weeks for people in more senior positions. Other issues, like a medical emergency that leads to time off, could mean your income is interrupted for longer.
Having three to six months of expenses in the bank could give you time to find new work or to make big cuts to expenses if need be. It could also help ensure you can cover most major home or car repairs. So, get serious about increasing your emergency savings in 2024 if your account balance isn’t that big yet.
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