The start of a new year is a popular time to focus on improving your personal finances. And the good news in that regard is that 81% of Americans say they plan to build up their emergency savings in 2024, according to recent data from Fidelity.
You may be eager to grow your emergency fund this year, as well. But if you’re not sure how much cash in your savings account to aim for, that’s understandable. Let’s walk through the numbers you should be focusing on.
How much does it cost to be you each month?
The purpose of an emergency fund is to give you money in the bank to fall back on in case unplanned expenses arise. Your emergency fund should also be set up to get you through a period of unemployment which, unfortunately, could happen at any time — even a time when the economy is in good shape and jobs are abundant.
A good starting point for calculating your emergency fund is to figure out how much it costs to be you for a month, and then multiply that total by at least three. For even better protection, aim for enough savings to cover six months of bills.
Now, when we talk about being able to pay for three to six months of expenses, most financial experts tend to focus on essential expenses — things you can’t go without, like rent, car payments, food, and medication. But you’ll also need to be reasonable when putting your numbers together.
Are you really going to cancel your $15 streaming service at a time when you’re stressed out about having to find a job and need the distraction of watching something funny on TV? Probably not.
Similarly, let’s say you have kids who are enrolled in different activities. Those may not be essential bills the same way your mortgage is. But do you want to yank your children out of art class and soccer for a few months while their friends continue because you’re out of work? Probably not.
As such, you may want to calculate what it costs to be you each month in terms of not just necessary expenses, but also, important expenses you wouldn’t want to have to give up. If your total comes to $3,000, then it means that at a minimum, you should aim for a $9,000 emergency fund. But you may want to reach for $18,000 if that’s doable for more peace of mind.
Also consider home and car repairs
It’s conceivable that a single home or even car repair could wipe out your emergency fund entirely. So if you own a car or home and think you’re likely to have to make repairs in the not-so-distant future, then you may want to pad your emergency fund beyond what you need to cover three to six months of bills.
It’s hard to land on a single number. A home repair could cost $2,000, or it could cost $20,000. You may want to think about the components of your car or home that are most likely to break in the near future, research the cost of fixing or replacing them, and then aim for that much more money in your savings.
It’s great to see that the bulk of Americans are aiming to save more in 2024. You may want to do the same, but it’s smart to have a game plan so you know what number you’re aiming for. And using this formula is a great way to get on the right track.
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