How much is enough? Why you need a substantial emergency fund
You never know when you might fall on hard times. Having money set aside ensures that you’ll be able to cope with life’s curveballs. The exact amount to save depends on how you spend. A minimum goal to shoot for is enough liquid funds to last you three to six months.
Where To Stash Your Safety Net
The money you put away for your emergency fund needs to be tucked out of the way so that you aren’t tempted to spend it. Your emergency fund should be safe, liquid, and separate from your regular checking and savings account.
A high-yield, federally-insured savings account is ideal. They’re insured for up to $250,000, so you know it’s safe and sound. Never invest your emergency fund in higher-risk investments. While it may be tempting to build your safety net those short-term, high-yield investments, the role of an emergency fund is to minimize risk.
How Much Is Enough?
Enough money to cover essential expenses for three to six months is just a loose ball-park estimate. While survival is the primary goal, peace of mind is just as important. Envision yourself losing your source of income. How much time do you need to transition to your next job comfortably?
Ideally, you want enough cash to cover expenses like health insurance, food, your mortgage and car payments without feeling rushed into a job that you don’t want.
Strategies For Building An Emergency Fund
Start saving slowly. If you’re starting your emergency fund from scratch, try to buckle-down and get $500-$1,000 in there as fast as you can. Even a small amount can ease anxieties about the future and make you prepared for small disasters.
Set monthly savings goals. Gradually build up to a reasonable target. When you exceed your savings goal, forgo rewarding yourself with extra treats like new clothes or a bonus night out. Add the extra cash to your fund instead and stay ahead of the game.
Knowing that you can survive even if you get fired can make you more relaxed at work and more in control of your destiny. That feeling is a reward in itself.