For example, if you need new tires or your roof leaks, your only way to pay for these fixes might be to take on debt — like putting the charges on your credit card. And when you add in the interest on this debt, these emergencies can get even more expensive.
Worse, if you lose your job and struggle to find work for a few months, how are you supposed to keep up with necessities like mortgage payments?
That’s where an emergency fund comes into play. Yet half of Americans don’t have over $500 in their savings accounts, according to a GOBankingRates survey.
Is $1,000 in Emergency Savings Enough?
But even $1,000 in emergency savings isn’t enough for many people. Instead, consider basing your emergency fund on a multiple of your monthly expenses, which likely means saving several thousands of dollars, if not tens of thousands.
“You should have somewhere between 3-12 months worth of expenses saved in a savings account,” said Jaspreet Singh, CEO of Briefs Media and host of “The Minority Mindset Show.”
Where you fall on that range depends on factors like your risk tolerance and if you have a family that depends on you financially. If you’re single, you might be able to scrape by on less. If you lose your job, maybe you could move back in with your parents temporarily, for instance.
“If you’re 25 years old, single, and you don’t mind taking on risk, you might only need a few months worth of expenses saved. You can be more aggressive with your investments right now,” said Singh.
But if you have kids of your own, uprooting them might not be as feasible — and you might prefer the security that comes with a larger emergency fund.
“If you’re 45 years old, married with kids, and are anti-risk, now you might want 6-12 months worth of expenses saved,” said Singh.
Despite Temptation, Resist Spending Your Emergency Savings
Keep in mind that your emergency savings should truly be for emergencies. Even though it might be tempting to reach into this pot of money if it’s sitting in your savings account, that defeats the purpose.
“This is not money you use to buy a new TV,” said Singh.
However, you could put your emergency fund in an account like a high-yield savings account. That way, even if you don’t earn as much as you might if you invested that money in stocks, you can still earn some interest income and have your emergency fund keep up with inflation.
Meanwhile, you still have the stability that comes with keeping your money in a bank account, rather than experiencing the ups and downs of the stock market. You never know when an emergency will occur, so you probably don’t want to have to raid your investment portfolio if the market happens to be in a down cycle.
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