The unexpected might happen at any time, so it makes sense to have an emergency fund set aside to cover unforeseen expenses. An emergency fund is money you set up in case of a major, unforeseen emergency, such as a job loss or a disaster not covered by insurance. Having an emergency fund in place can help you safeguard your loved ones and yourself, and generating a small return on your savings can help you maintain your spending power in the future.
Here are the answers to five often asked concerns concerning emergency savings, including how big your emergency fund ought to be and where you might think about storing it.
How much of an emergency fund should I have?
To guard against the financial repercussions of a probable job loss or the loss of other income, Fidelity advises saving at least 3 to 6 months’ worth of critical expenses.
You might feel secure with three months’ worth of savings if you’re single and have support from your family. However, you could feel comfortable with 6 months or perhaps longer if you have a spouse, children, and a mortgage as well as if you are concerned about rapidly replacing a lost work or other source of income.
There may be options available to help lessen the impact if you do become unemployed. All 50 states, the District of Columbia, Puerto Rico, and the US Virgin Islands all offer unemployment insurance benefits. However, not every employee qualifies since your business must pay unemployment taxes. Churches and educational institutions that are nonprofits are excluded from paying unemployment taxes.
By state, benefits differ. For instance, if you have children or other dependents, several states offer additional benefits. Find out how to apply for benefits and what documentation is needed by contacting the unemployment insurance office in your stateOpens in a new window.
To be eligible for unemployment benefits, a person must:
- You must be physically capable of working and not in need of disability payments or disabled.
- You need to be actively seeking employment.
- You must have abruptly, unjustifiably, and in good standing quit your previous position.
- Your payments can be decreased if you’ve received unemployment insurance within the six months before filing.
2. In what location should I store my emergency fund?
Along with avoiding riskier investments that could result in losses, it can be a good idea to have your emergency fund accessible and liquid. It can also make sense to keep your emergency fund distinct from your spending money and other types of savings in order to prevent having to use your emergency savings.
A savings or money market account may be intended by that (different from money market funds). These can be accessible and practical choices, but you should be aware that the typical yield might be under 0.15%. 1 Money market accounts are primarily provided by banks and credit unions. A money market account could have a larger minimum balance than a savings account, and withdrawals might be restricted. You might, for instance, be permitted an unlimited number of ATM withdrawals, but checks and debit card transactions might be constrained.
Think about these alternatives:
Money market funds2 typically offer better returns than your regular savings account and tend to be a lower-risk option for storing your cash. Money market funds are not FDIC-insured, unlike savings accounts, albeit they might be SIPC-insured.
Treasury and government money market funds3 do not restrict investors’ access to their money in the funds and are intended to maintain a consistent net asset value (NAV) of $1.00.
Even better rates than money market funds may be available with certificates of deposit (CDs), but there is a caveat. Many impose fines if you withdraw funds before the CD expires. For a portion of your emergency fund, short-term CDs might be an option, but you shouldn’t lock up all of your savings because liquidity is a key element of your rainy-day fund.
If you’ve separated your emergency savings into highly liquid accounts and ones that are harder to access, you might want to take money from the more liquid accounts first when you need to use your emergency fund. Savings accounts are an example of a very liquid account because they may be quickly and cost-free accessed the same day. Money market fund cash might not be immediately accessible; instead, you could have to sell the fund and wait until the following business day to receive your money.
The objective is to prevent losses brought on by taxes, penalties, or market volatility.
If you aren’t yet retired, try to refrain from taking withdrawals from retirement accounts like your 401(k) or IRA. The early withdrawal may result in taxes and a 10% penalty.
3. What about taking out a loan to pay for an emergency?
If you don’t have enough cash on hand to handle an emergency, you might need to borrow money in some situations. Considerable options include credit cards and home equity loans or lines of credit. Keep in mind that it’s crucial to take into account any potential repercussions of borrowing against your house. There can be consequences in terms of money, law, taxes, and estates. You can even lose your home if you don’t pay back the loan.
4 Warnings :
- Borrowing money, especially at a high interest rate, can be problematic if you’ve lost income. If you can’t pay off your debt at the end of the month, it may start to accumulate quickly.
- If you already have a lot of debt, relying on credit or loans during a crisis only deepens your hole and makes it tougher to climb out.
- In a worldwide economic downturn, credit may not be as readily available. It’s possible for lenders to restrict lines of credit during hard times, so they’re not always a sure thing.
- Make sure to maintain interest rates as low as possible if you must borrow money.
4. How can I increase my emergency fund savings?
There are a few strategies for increasing savings, even on a limited budget.
Your emergency funds should be compared to a bill. You already have a lot on your plate with rent or mortgage payments, retirement fund contributions, and several living expenditures. However, if you make saving for an emergency fund a monthly priority, you’ll develop the habit of making regular contributions.
Reduce expenditure. If there are any expenses on which you may make savings, it might be worthwhile trying it out—at least briefly. If you put some of those funds into an emergency fund, it might grow more quickly.
5. Can insurance provide emergency protection for me?
Insurance is another means of being ready for an emergency, in addition to having cash on hand. The more insurance coverage you have, the less money will need to be taken from your emergency fund in cases where insurance would offer coverage.
Consider purchasing disability insurance. You’ll want to be certain that you have adequate money in case something unexpected arises, whether you have it through your job or on your own.
Remember to have health insurance. You might lose your employer-sponsored health insurance if you lose your work. Even if you qualify for COBRA continuation coverage, you should expect your premiums to rise dramatically because they can be up to four times as expensive under COBRA than they would have been as an employee paying for the same coverage while employed. 4 Just in case, take into account some extra cash to cover the cost of medical care.
The conclusion
Regardless of age or income level, everyone should have an emergency fund. The most recent example is the ongoing pandemic. However, there are a variety of additional situations that can necessitate having cash on hand, including job loss, natural catastrophes, a leaky roof, unforeseen child care costs, an unexpected medical expenditure that insurance won’t cover, and family members visiting or in need of assistance.
Having a plan is essential. You’ll be better equipped to handle whatever life throws at you if you’re disciplined about saving for emergencies in liquid accounts, supporting your savings with insurance, and keeping some low-interest credit available as a last choice. And having that information can help you relax.
