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Many people build sizable emergency funds to protect themselves financially. Job loss, sickness, home repairs, and unexpected vet bills are some examples of unanticipated life situations that can significantly impact your wallet. You can feel more confident by having extra money in an emergency savings fund.
But how much money is enough? And when should you stop contributing to this fund? Here’s what you need to know.
Prioritize building an emergency fund
It’s wise to prioritize building an emergency fund. For many people, this takes a long time to do. One might start with $500 and slowly spend years building their fund. No one amount of savings is ideal for every person because we all have unique needs and financial situations. You should save enough cash to handle a life-changing situation or expense comfortably.
Many experts suggest saving three to six months of monthly expenses in a high-yield savings account. The thinking behind this guideline is that it will be enough money for someone to continue paying their bills while they figure out how to navigate a life-altering situation. In the case of job loss, this could buy someone time while they look for another job.
As you grow your emergency fund, consider how much money saved will make you feel more at ease. But there may come a point where you’ve saved enough money and should consider working on other financial goals.
Don’t neglect planning for your retirement years
In addition to saving for emergencies, many people invest money to prepare for retirement. Contributing to a retirement account like a 401(k) or an IRA is a great way to build a nest egg for your golden years. Once you have enough money stashed away in your emergency fund, consider boosting your retirement account contributions.
Here are two considerations when deciding whether it’s time to stop contributing to your emergency fund.
Have you maxed out your annual contributions?
If you still need to max out your annual retirement account contributions, check to see if you can allocate more money toward this goal. If maxing out your contributions is entirely out of your budget, that’s understandable. But if you have a sizable emergency fund and can afford to contribute more money, you may want to prioritize this goal.
Are you taking advantage of your employer match?
Take advantage of your company’s 401(k) match if you have this valuable employee benefit. Some employers offer to match employee 401(k) account contributions up to a certain dollar or percentage amount per year, and that basically equals free money. Contributing enough money to maximize the match is wise if you’re trying to boost your contributions.
Investing for retirement may be more manageable if you no longer contribute money to your emergency fund. But if you’re still building your savings stash, consider whether you can make other budgetary changes to free up extra cash for this important financial goal.
If you’ve struggled with overspending, using one of the best budgeting apps to monitor your spending and set budgeting limits may be helpful. Another option could be to get a part-time gig, side hustle, or a better-paying full-time job so you have more income to meet your goals. No matter what goals you’re working on, always keep your personal finances in mind.
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