Should you increase your cash reserves?
- A strong emergency fund is one with three to six months of essential living expenses.
- You may want to add extra money for unforeseen additional bills.
The pandemic has taught many people the hard way that having an emergency fund is crucial. When the COVID-19 epidemic first hit American soil and millions of jobs were cut overnight, unemployment systems were overwhelmed and some tax filers had to wait weeks for their requests are processed, leaving them without any sort of income. Those who did not have money in their savings accounts to fall back on undoubtedly had more difficulty than those who did.
Of course, for many people the pandemic has been a wake-up call to get out and start saving. But 41% of Americans worry that they don’t have enough money set aside for emergencies,
according to a new survey from Lincoln Financial Group. Here’s how to tell if you’re ready in this area or if you need to step up your savings efforts.
What do your essential monthly bills look like?
Some people go for a lump sum for emergency savings, like $ 10,000, and assume they are all ready. But while $ 10,000 may be enough money for some people’s emergency funds, that amount may not be enough for you.
Rather than settling for just a round number, review your bank and credit card statements to see what your essential monthly costs look like. Then take that total and multiply it by a minimum of three. If you normally spend $ 3,500 per month for the most part, a $ 10,000 emergency fund will leave you a little short, as you will need $ 10,500 to cover your basic needs.
Keep in mind that while your emergency fund should cover the essentials, you may also want to factor in a few non-essential expenses. After all, if you don’t have a job, is it really reasonable to ditch cable, your streaming services, or whatever else you use for basic entertainment? The key is to figure out what expenses you really can’t do without when performing these calculations.
Are you the owner?
If you are a homeowner, you may want to inflate your emergency fund to account for potential repairs. Now here is where you To do have the flexibility to settle a lump sum. You can decide that in addition to covering three months of essential bills, you will add $ 3,000 to your emergency fund in case you need to replace a major appliance, fix your heating and air conditioning system or have your roof repaired. Since there’s no way of knowing what you might spend on a repair, landing on a random but large sum is okay here.
Do you own a car?
Just as home repairs can become necessary out of nowhere, so can auto repairs. That’s why you should consider adding a lump sum to your emergency savings if something goes wrong. You may decide that $ 500 will be enough, and again, since it’s hard to predict what an auto repair might cost you, that’s fine.
Do you have a high health insurance deductible?
If you have a high deductible attached to your health insurance plan, you may want to put that amount aside in your emergency fund in addition to the money you save to pay essential bills. Suppose your plan has an annual deductible of $ 1,500. It is worth trying to reduce this amount so that you can find it if needed.
Ultimately, when it comes to supplementing your emergency fund, a lot will depend on the level of protection you seek. Some people are okay with saving three months of essential expenses and calling it a day, even though they also own a home and own vehicles. Think about what will give you peace of mind and use it to determine your personal savings goal.
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