The best way to handle urgent, unplanned expenses is to set up an emergency fund for yourself. With an emergency fund on hand, you can withdraw the necessary savings to cover an urgent expense and resolve an emergency right away. It’s that simple.
So, how much should you save in your emergency fund?
Covering the Basics
When you’re starting an emergency fund, you should aspire to collect $1000-$2000 inside it. This should help you cover small-scale emergencies like flat tires, home repairs and last-minute dental appointments without disrupting your budget.
Emergency Fund Alternatives
In the early days of your emergency fund, you might not have a lot of savings to rely on. If an urgent expense crops up and you don’t have enough savings available, you can turn to a credit tool as an alternative solution.
You could put the expense onto your credit card, or you could use an online loan. When looking into online loans, double-check their availability. Not all loans will be accessible in your home state. So, if you live in a state like Arizona, you will want to narrow your search to online loans in Arizona — this way, you know that you’ll be looking at loans intended for people who live in that state. You don’t want to waste your time filling out applications for loans that Arizonans can’t get.
An emergency fund is the easiest way to manage emergency expenses. But when you can’t rely on your fund, you’ll want to turn to one of these effective alternatives.
Saving for Big Problems
Don’t stop contributing to your emergency fund after saving $1000-$2000. You should keep adding money into the fund until you’ve acquired at least three to six months’ worth of your income. This amount can help you withstand times of financial instability when your income is drastically reduced or eliminated. You’ll be able to pay your bills, buy groceries and manage other essentials temporarily without having to panic.
What are some situations where this would be necessary?
- When you lose your job
- When you fall ill and can’t work
- When you need to step in as a caregiver for a relative
- When a loved one passes away, and you need to take time to grieve and handle their estate
The COVID-19 pandemic is the perfect example of when this amount of savings would come in handy. Millions of Americans were thrown into precarious financial positions because they lost their jobs, had their hours cut or fell ill during the pandemic. Many parents had to quit their jobs to be full-time caregivers for young children since schools and daycares closed. The entire situation is proof that your financial stability could be upended at a moment’s notice, and you might need a strong safety net to catch you.
Affording Time to Recover
A large emergency fund doesn’t just help you cover essentials. It gives you time to set up other safety nets or find alternative sources of income so that you can regain stability when the savings run out.
For instance, if you suffer from sudden job loss, you have some time to apply for unemployment benefits and wait for those benefits to come in. You also have more time to hunt for a new job without feeling pressured to take the first option that comes your way. You don’t have to settle for a terrible replacement just because you have bills to pay. Your emergency fund gives you a chance to find the right pick. It’s time for you to set up an emergency fund. Start saving now!
