Many financial experts talk about the importance of having a separate emergency savings fund to cover any unexpected or unplanned expenses. This makes sense considering how much something like a surprise medical bill or layoff from work can set you back financially when you’re not prepared.
In a recent GOBankingRates survey, we found that 44% of people prioritize contributing to their emergency fund instead of saving for other things like retirement, a car or house, or other major expenses. This isn’t necessarily a bad thing, but there may be some merit in dividing your savings based on your needs and goals.
If you’re not sure whether you should put all of your money toward one specific thing — like an emergency fund — or if you should separate your savings across several categories, here are some things to consider.
It’s Important To Have an Emergency Fund Goal
Everyone’s situation is different, so it’s vital that you set some financial goals for yourself based on what you and your household needs. One way to do this is by setting a goal for your emergency fund. After all, while it’s good to have an emergency fund, you might want to prioritize other savings goals once you’ve saved up a certain amount in it.
“I do think you should prioritize an emergency fund over other savings and investments,” said Sebastian Jania, Owner of Ontario Property Buyers. “That being said, however, there needs to be some kind of goal with the emergency fund such as 6 months or 12 months of emergency savings.
“To save for an emergency fund indefinitely is priming oneself for emergencies. When one has this 6- or 12-month buffer in place, the next step is to then be focusing on the next most immediate thing, such as a house or retirement.”
You May Want To Prioritize Paying Off Debt
If you have debt, especially high-interest credit cards, medical bills or loans, you may want to focus on paying that off before saving up for an emergency fund.
This is because your current debts can take a toll on your mental and financial health. It can also make it harder to manage other expenses when they come up, since you’re putting extra money toward your monthly debt payments.
“For most people, your first priority should be to get out of debt, and your second priority should be to build an emergency fund of 3-6 months of expenses,” said Jay Zigmont, PhD, MBA, CFP, and Founder of Childfree Wealth.
“An emergency fund will help to prevent you from going back into debt. Keep your emergency fund in a high-yield savings account.”
You Might Not Need More Than Six Months
Once you’ve paid off your expensive debts and saved up for your emergency fund, that’s when you’ll be in a better position to shift your focus to other financial goals.
“Once you have your emergency fund set, focus on other goals like saving for a house or retirement,” suggested Zigmont.
“Keep in mind that having an emergency fund of more than six months is not going to make you safer. If you have more than six months of expenses [saved up], it is time to invest your money towards your goals.”
Consider your other priorities and set achievable short- and long-term goals to make them happen.
This could mean saving up for a down payment or investing in your retirement fund. Or it could be creating a trust or education fund for your descendants. It could even be putting money toward purchasing a car or going on vacation.
Whatever the case may be, having an emergency fund first can give you the financial buffer you need in case something happens.
There’s More Than One Solution
Although having an emergency fund is important, it’s not unusual to have other savings goals as well. Many people end up trying to save for multiple things at a time, which can be helpful in certain cases.
“It’s natural to be juggling several financial priorities at the same time, and it can be a challenge to balance short-term goals like building an emergency fund with long-term ones like saving for retirement,” said Terri Fiedler, President of Retirement Services at Corebridge Financial.
“There’s no one-size-fits-all approach, so it’s important to work with a financial professional to set your goals, chart your path and make informed decisions.”
You can also choose to figure out your savings goals by yourself, or within your household. Just make sure everyone is clear about the goals you want to achieve, how you plan to accomplish them, and your timeline.
You May Have Other Options To Fall Back On
Although having a fully-funded emergency fund can keep you afloat in the face of a financial setback, it’s not your only option. If you have an employer-sponsored plan, you might be able to use it to help with unplanned expenses as well.
“For emergency savings, employer-sponsored retirement plans will soon become a part of the solution. Congress last year approved SECURE 2.0, new retirement legislation that does a lot to help American workers balance financial needs now and for the future,” said Fiedler.
“Two provisions in SECURE 2.0 focus on managing unexpected expenses — one that allows tax penalty-free access to retirement funds for emergency needs and another that helps employees create emergency savings accounts linked to retirement accounts.”
These changes may take some time to take effect, however. It’s also still a good idea to have more than one way of covering emergency expenses. Because of this, you may want to prioritize establishing your emergency fund before splitting your savings up across multiple goals.
Your Emergency Fund Is Just the Start
“It is wise to prioritize building an emergency fund because that provides a safety net for unexpected expenses or sudden income loss. Such a fund prevents unplanned debt and offers peace of mind,” said Matt Steenson, Head of Consumer Banking at PNC Bank.
“Once you’ve accumulated enough, you can shift the focus to long-term financial goals like retirement or saving for a house. While all these objectives are important, the immediate protection offered by an emergency fund is critical.”
Steenson also gave the following suggestions as to what you might want to do with your money once you’ve got an emergency fund:
“Allocate about 10-15% of your income toward retirement, taking advantage of employer matches, where possible. If homeownership is a goal, begin by determining your home purchase timeline and the expected price you can afford, including closing costs and a down payment, so you can calculate the total funds required. Divide this by the number of months until your planned purchase to determine required monthly savings.”
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