Did you know that according to recent survey, roughly 26% of adults in the U.S. have no savings set aside for emergencies*? What do you think is the percentage of adults that experience financial emergencies each year? It would be nice to think that it’s somewhere in the neighborhood of 26%, but it is surely higher.
You probably periodically consider starting an rainy day fund but then something comes up to pay or save for and you put it off to next year. No matter how small your first contribution is, now is the time to get serious about building (and keeping!) a healthy emergency fund.
Why Have an Emergency Fund?
Separate from your general savings account, every individual and family should have a designated emergency fund with a consistent balance. Anyone with children knows how common unexpected dental work or home repair can be, but even unattached adults need to be able to survive a lay-off or medical emergency.
Other than interest, another thing that can be gained from having an emergency fund is simple peace of mind. Anyone who has ever lived paycheck to paycheck can tell you that it is not a fun lifestyle; the smallest financial inconvenience can spell falling behind on important bills, not to mention sleepless nights. By having a designated emergency fund, you are buying yourself a sense of security just as much as you are paying for those unforeseen life events.
How Big Should My Emergency Fund Be?
The general rule of thumb for an emergency fund is three months’ worth of expenses. Obviously the more savings the better, but enough cash to get you through three months should be your minimum. This fund can be for anything from medical bills to home repair, but it should also be large enough to support you and your family in the event of losing steady income.
If you do not already have a good idea of how much you spend each month on everything from housing to groceries, figure out that amount first. Go back and take a good look at your spending habits. Guessing your total grocery bill won’t do you any favors if you have to live off of your emergency fund and realize half of it is being lost to food.
Once you have that monthly figure, multiply by three and then add a little cushion of maybe 10% more for good measure. Don’t stop there if you have the means to beef up your emergency fund even more, but three months should be your absolute minimum balance at all times.
If you don’t have an emergency fund, today is the perfect day to start one. Open a separate savings account, deposit just $100, and make the mental decision to never withdraw money unless it truly is an emergency. Your future self will thank you.
Check out this video to learn more about emergency funds!