Here’s How Much You Should Have in Your Savings Account for an Emergency
With talk of inflation and the looming possibility of a recession, you might be wondering exactly how bad the economy is, and how much cash you should have on hand. Interest rates are also going up, which means if you have student loans, car loans, credit cards or a mortgage, you’re paying more in interest than you usually have in the past. Prices for energy, housing and food are still on the rise, resulting in spending more on these than you ever have before. Because of these factors, it’s important to have some savings on hand, but it’s only getting harder to save.
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In a recent survey, GOBankingRates found that over a third of Americans have $100 or less in their savings account. Only 19% maintain a balance between $101 and $500. And when asked how they would pay if faced with an emergency, a quarter of Americans said they’d go into debt. To help you budget better, we’ll break down exactly how much you should have in your savings account for an emergency this year and how you can get there.
What’s the Magic Savings Number?
The amount of emergency cash you should have is based on your income and needs. Emergency cash should be money you have in a savings account and not cash that’s in the stock market or a 401(k). The point of the emergency fund is to use it in — you guessed it — emergency circumstances. This means layoffs, sudden expenses and anything else costly that you might not have anticipated.
The GOBankingRates study found that 76% of respondents stated they have a savings account and only 19% have $101 to $500 in savings, while 37% stated there is only $100 or less in their savings account. How much you should have on hand should be between three to six months’ worth of expenses, according to financial experts. This might seem like a very high number to put away in savings, but remember, this amount should cover the basics. Think about what you really need in a month: rent, utilities, insurance costs, cell phone bills, internet bills, etc. These are the things you cannot go without. If it still seems high, just think about reaching three months’ worth of expenses for now. Six months doesn’t have to be a priority if it’s truly not achievable.
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How Can You Get to That Number?
There are plenty of ways that you can earn your emergency savings. One is to pick up a seasonal job or side gig to supplement your income. Think about activities you like to do, and see if there is any way to monetize them. Once you start earning the extra money, dedicate all of it to your emergency savings.
If you want to work with your current income, download an app to help you budget and save. Apps like Mint, YNAB, or Goodbudget are all apps you can use to help track your spending and find ways to save extra cash. Each app specializes in different methods of budgeting, so try out a few to see which one works best for you. After all, if you don’t like how an app works, you’re not going to use it. Find one that you really understand and gravitate toward.
Reexamine Your Current Expenses
It’s a good rule of thumb to take a look at your insurance payments once a year and comparison shop. Insurance premiums fluctuate, so you might be missing out on a better deal with another provider. The same goes for your internet costs. Call your internet provider at least once a year to see if there are any specials you can take advantage of that would lower your monthly fee.
Once you take a good look at your budget, see where you can decrease your spending. Are you spending $300 a month on takeout? Plan to cook at home more and lower that number down to $100 on takeout a month, then sock the extra $200 away in your emergency fund.
If you’re living with a partner and you own more than one car, those expenses can really add up. The average cost of owning a car can be more than $10,000 a year with maintenance and gas. Think about how often each of you drive, and if you could downsize to one car. If the public transit is good where you live, this might be a great option to save thousands a year that you could put in an emergency fund.
Pay Off Debt
Especially with rising interest rates, it’s wise to prioritize paying down your debt as much as you can. Start with the debt that has the highest interest rate and go from there. Many financial experts consider paying off debt just as important as building an emergency fund. If you can, it’s smart to do both at the same time. Take half of the extra cash you’re earning and put it toward savings, while dedicating the other half to pay off your debt. Soon, you’ll have no debt and a healthy savings account to bail you out of tight financial situations.
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Ashleigh Ray contributed to the reporting for this article.