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When you get out of debt it is an absolutely liberating feeling. The idea that you get to actually keep more of your money! So, what should you do with that money that is now sitting in your account?
Maybe go on a shopping frenzy? Maybe go on that luxury vacation? Nope! If you do not yet have a fully funded emergency plan, you need to make sure you do that before you do much more.
WHAT IS AN EMERGENCY FUND?
Let’s get back to basics first. What exactly is an emergency fund? It is money that you have saved for, well, an emergency. Some examples could include the furnace going out, your refrigerator needing repair, the car breaking down. Things that it does not include are e a flat screen TV marked way down, new soccer cleats for your child or a vacation to Mexico. Those items are wants and you should save for them separately.
Of course, you do need to save for the fun things in life too – that is important. The simple way to make sure you have money set aside for emergencies which is separate from regular savings is to set up two different savings accounts.
Once you have that done, you will designate one for your regular savings for things such as taxes, birthdays, this year’s vacation, etc. The other should be your emergency fund. It should have money going in and only coming back out for emergency situations.
The reason I recommend two accounts is just to make it easier to track your savings. It also helps you make sure you truly have an emergency fund at your disposal. For many, it is easier to monitor if the accounts are separate.
Above I mentioned some reasons you might need to access your emergency fund. However, the most important reason to have your account established is in the instance of a job loss. As we have seen in past years, it is taking Americans longer to find new employment.
HOW MUCH DO YOU NEED?
The biggest question many people have is “How much do I need to save?” Years ago, prior to the recession, experts advised that 3 – 6 months of income was sufficient. With the changing times, it is now recommended to have a minimum of 6 months as a single person and as much as 9 months for a family. I know, that seems like a lot of money, and it will take time, but it is possible.
When determining how much you need to save in the instance you lose your job, you need to first look at your monthly budget. Take a look at those items you could do without should you suffer a job loss. Next, add in the additional cost of health insurance, as this will be out of your pocket during the time you are unemployed. Take the total you need to cover your expenses times the number of months worth of savings you need (see above).
HOWDO YOU INCREASE YOUR SAVINGS?
Now that you have no debts, it is important to take the monthly “debt” payment and just pay yourself. Even if it is only $200 a month, look at what you will have saved in 6 months time — $1,200! Sure, it might take you a year or two to get that money saved up – but it might also go more quickly than you think. Windfalls, bonuses, tax returns – these are all things you can use to contribute towards your savings to help you achieve your financial goal.
Just when you think your debt free journey is over, you will find that there is another one stepping in to take it’s place. It is not a race to the finish line. In the case of financial freedom, slow and steady always wins the race.
(I am not a financial advisor and the information listed within these Debt Challenge posts is not to be construed a financial advice. This is knowledge we gained through our own personal experiences and information as outlined in Dave Ramsey’s Financial Makeover — and is being shared as such. Participants are not required to follow any steps listed if they do not wish to do so. Financial concerns/issues should be addressed with a professional in order to receive advice and assistance.)
“For single moms, my recommendation is at least 12 months of expenses saved.” Noting that a single mom's life is already stressful and hectic, Wang writes that such parents need financial flexibility to make choices that prioritize children rather than just money.
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.
While the typical framework for an emergency fund is to set aside between three to six months' worth of savings, Orman recommends saving eight to 12 months of essential expenses in an emergency fund for known expenses.
How Much You Should Have in Your Emergency Savings. Here's a Dave Ramsey principle we agree with: If you make less than $20,000 per year, aim to have at least $500 in emergency savings. If you make more than $20,000, then aim for at least $1,000.
Track the way you spend money and ask yourself what you can do to be more responsible when it comes to your finances. Open a bank account and try not to carry a lot of cash, as it's easier to overspend. Avoid going into debt unless it's an emergency, and live within your means.
Saving $5,000 in an emergency fund can be enough for some people, but it is unlikely sufficient for a family. The amount you need in your emergency fund depends on your unique financial situation.
People have different estimates about the best amount to save in an emergency fund, and the answer will depend on your income and spending habits. Generally, your emergency fund should have somewhere between 3 and 6 months of living expenses.
When asked how much money they'd need to save for a financial emergency to avoid additional stress, 40% would feel comfortable having a modest amount — below $2,500 — set aside. 21% say they'd need at least $10,000 saved to feel secure.
A $20,000 emergency fund might cover close to three months of bills, but you might come up a little short. On the other hand, let's imagine your personal spending on essentials amounts to half of that amount each month, or $3,500. In that case, you're in excellent shape with a $20,000 emergency fund.
I refuse to eat out. I think that eating out on any level is one of the biggest wastes of money out there. A lot of people feel they can't save money right now. How would you challenge that notion?
Fully funded emergency fund: Once that debt's gone, you need a fully funded emergency fund of 3–6 months of expenses. (This follows the 7 Baby Steps, the proven plan for getting out of debt and building wealth that my fellow Ramsey Personalities and I really break down in Financial Peace University.)
As of May 2023, more than 1 in 5 Americans have no emergency savings. Nearly one in three (30 percent) people in 2023 had some emergency savings, but not enough to cover three months of expenses. This is up from 27 percent of people in 2022. Note: Not all percentages total 100 due to rounding.
American households, on average, have $41,600 in savings, according to data last collected by the Federal Reserve in 2019. The median balance for American households is $5,300, according to the same data.
Wiping out high-interest debt on a timely basis will reduce the amount of total interest you'll end up paying, and it'll free up money in your budget for other purposes. On the other hand, not having enough emergency savings can lead to even more credit card debt when you're hit with an unplanned expense.
A $20,000 emergency fund might cover close to three months of bills, but you might come up a little short. On the other hand, let's imagine your personal spending on essentials amounts to half of that amount each month, or $3,500. In that case, you're in excellent shape with a $20,000 emergency fund.
Those include things like rent or mortgage payments, utilities, healthcare expenses, and food. If your monthly essentials come to $2,500 a month, and you're comfortable with a four-month emergency fund, then you should be set with a $10,000 savings account balance.
It's important to have cash reserves available, but $100,000 may be overdoing it. It's important to have money available in your savings account to cover unforeseen expenses. Plus, you never know when you might lose your job or see your hours (and income) get cut, so having cash reserves at the ready is important.
Introduction: My name is Tyson Zemlak, I am a excited, light, sparkling, super, open, fair, magnificent person who loves writing and wants to share my knowledge and understanding with you.
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