How Much Emergency Savings Should I Have?
By: Klvr Savings
Tags: Personal Finance, Saving Money, Tips, Money

Life is full of unexpected and unpredictable moments. It can sound strange to prepare for an event that hasn’t happened or may not ever happen. But saving for an emergency fund to cover your expenses when such events occur is a financial habit that every person should regularly practice. More than half of Americans have less than 3 months’ of expenses saved; 28 percent of those people have no emergency savings at all.

The reality is that the majority of debt piled up on people’s shoulders is because of emergency situations. About 15 percent of Americans report feeling as though they will be battling against debt for the rest of their lives. Having an emergency savings account can help relieve the stress of dealing with an unexpected financial situation.

What is an Emergency Savings Fund?

Before you figure out how much emergency savings you need to save, you need to understand the differences between a rainy day fund, and an emergency savings fund.

A rainy day fund covers smaller expenses that don’t occur regularly but are expected, such as various home repairs, car repairs or a co-pay at the doctor’s office.

An emergency fund should be set aside for larger, unexpected financial events that affect your ability to earn income. These events include the sudden loss of a job, or a health event that leaves you unable to work for an extended period of time.

Keep in mind that your emergency fund should be strictly used for emergencies that involve a loss of income, not for large purchases or as a down payment. Your emergency savings fund should be in place to cover your necessary fixed expenses for at least 3–6 months’ time.

How Much Should I Save for My Emergency Fund?

Understanding how much to put in your emergency savings starts with calculating your fixed expenses. A good rule of thumb is to save for at least 3–6 months’ worth of expenses.

Focus on your fixed expenses first, which means tallying up all the expenses that are the same from month to month — things like your rent or mortgage payment, car payment, your Internet bill, and so on. You’ll also want to have a good estimate of other important necessities that you’ll need on a regular basis, such as gas and groceries. Calculate a month’s worth of expenses and then multiply that number by 3 to get your 3 months’ total emergency fund.

You should then set a goal for saving more money on a regular basis. Whether you choose to save weekly, bi-weekly, or monthly, you should factor this amount into your budget. It may be worth automating your saving by setting up to split your direct deposit from your paycheck into a savings account. By prioritizing your savings, you are ensuring that this money is set aside for your emergency fund.

Don’t forget to reward yourself when you meet your savings goal and have at least 3 months’ worth of emergency savings. Rewarding yourself for meeting a saving goal is a great way to make it a solid financial habit.

Where Should Keep My Emergency Savings Fund?

When building up any kind of savings, it’s best to keep your money in a low-risk account where the money can be accessed easily so that you can use it at any time. Ideally, you’d want to save your money in a place where it can make additional money, too.

Some people may think that keeping longer-term savings in a 401(k) or similar retirement account is adequate, but the lack of immediate access to this money makes it a poor choice for saving, and you may even lose your principal in a long-term retirement account.

Popular types of savings accounts include certificates of deposit (CDs) or a high-yield savings account. However, these accounts can require minimum balances, can sometimes incur fees if you need to withdraw the cash, or require a period of waiting time before you can access your money.

An alternative is to consider a Klvr Savings account, which keeps your money safe in a liquid account while still accruing interest. You can get rewarded for consistent savings behavior, and even have chances to win larger cash prizes each month, quarter, and year on top of the money you save.

What Happens If I Use My Emergency Savings?

Finally, if there comes a day that you need to dip into your emergency savings account to cover your expenses, be sure to also have a plan in place to replenish this account once everything has settled.

Saving for an emergency savings fund can seem overwhelming but it’s feasible once you put together a plan for consistent saving in a liquid account. With an emergency savings fund in place, you can bring yourself peace of mind that you can handle any unexpected event that rocks your financial situation.

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Originally published at klvrsavings.com on September 23, 2020.