Having a little cash tucked away for emergencies can provide great peace of mind. With a solid emergency fund, you can live easily and manage for a few months even when faced with drastic financial adversities such as job loss. People who faced such adversities will tell you how thankful they are they had an emergency fund. We have provided you with an emergency fund calculator just for securing your financial future.
The problem is not many people think about securing their future. A study by Bankrate has estimated that nearly one-third of Americans have no emergency savings of any kind. In Canada, about 53% of people are living paycheck to paycheck. This is a troubling trend in today’s generation.
In this article, you’ll explore the significance of having a rainy-day fund. You can also use our emergency fund calculator to help you get a rough estimate of how much you should have saved at this point.
Related Article: 5 Easy Ways to Boost Your Emergency Savings Account
What Is an Emergency Fund?
Before we deep dive into our savings goals, let’s define what is an emergency fund. An emergency fund is a lump sum stored within a savings account. It’s there purely to pay for any emergencies which may crop up. It could be that your car has broken down, or you need to pay emergency vet fees, or you may need to repair something in the home. An emergency fund ensures you can rectify any problems quickly, reducing stress and providing great peace of mind.
How Much Should You Be Saving?
You’ll find a lot of contradicting advice relating to how much you should be saving. Many experts suggest saving at least three months of expenses. However, we suggest that at least six months of your living expenses should be covered in your emergency fund.
So, if all your bills and expenses came to $1500 per month, for example, you should save $9,000 for managing emergencies.
To work out how much you should save, it’s also important to consider your family’s situation. This includes job stability, whether you rent or own your own home, and how large your family is.
Also, think about potential financial emergencies that may take you for a ride – sudden car repairs, medical bills, job loss, etc.
Look at your emergency fund like you would with insurance. It is an investment to protect you and your family if anything does go wrong. So, committing to build an optimal emergency savings fund is going to ultimately protect you and the family.
Use Our Emergency Fund Calculator
You don’t have to start big with your emergency fund amount. As little as $200 per month can help you build a decent sum over a few years. However, saving money without a goal will not take you that far. To create an optimal fund, you need to determine the exact amount you need. This is where our emergency fund calculator can help you.
Just choose the amount values for your monthly expenses, and you will have your ideal emergency fund amount.
The Disadvantages of Saving Too Much
While it may seem logical that the more you save in your emergency fund, the better off you will be, this isn’t always the case. Firstly, you could actually lose money by having it in a savings account. This is because you generally earn around 1% back each year on the amount you save. This doesn’t cover the inflation rises, meaning you’re losing money throughout the year.
Another downside of having too much money in an emergency savings fund is that you’ll be missing out on your other financial goals. Some of the money could be put towards your retirement, or for paying off any debt that you might have.
So, it’s important to consider your current financial position before throwing all of your savings into an emergency fund. Paying off debt could be the better option – if anything were to happen, you wouldn’t have to worry about missing debt payments on top of everything else. It is all about striking the right balance between various expenses.
Having an emergency fund is essential in today’s economy. However, it’s also important to understand how much you should be saving. The above amount show in our emergency fund calculator is just a general guide on the amount of money you should aim for. If you have between three and six months’ savings to cover everything, that’s all you should need in the event of an emergency.