If you had to pull $1,000 out of your savings to cover an emergency, could you? According to one study, 39 percent of Americans couldn’t. But emergencies happen to 100 percent of people, whether it’s your heater petering out in January or a car accident that lands you in the hospital. One of the first lines of defense is an emergency fund.
Having emergency fund savings can help you avoid taking on high-interest debt or borrowing from your long-term savings and investment accounts, which can carry steep penalties. But how much do you need to save in your emergency fund? To start, try setting aside one months’ worth of essential living expenses in a dedicated account so that you have at least some security while you work toward other financial goals. So, if you need $2,000 a month to cover essentials like housing, utilities, food and transit, make that number your first savings milestone.
Going forward, work on building up your emergency fund until it could cover your essential living expenses for at least six months. Yes, that’s $12,000 in the example above. But you don’t know how much an emergency is going to cost or how long you’ll need to pay for it. If a critical illness brings on medical bills and puts you out of work at the same time, it’ll be nice to know that at least you don’t have to worry about making rent.
With this in mind, it may also make sense to look into supplemental insurance options to add an extra layer of financial protection to your emergency fund. These plans give you cash in the event of certain illnesses, accidents and hospitalizations. Money can’t buy happiness, after all, but it can take away one major source of stress as you recover.
To learn more about emergency funds and supplemental insurance, check out Why an Emergency Savings Fund Is Worth It — and How to Get Started.