When planning your finances, it’s important to think about emergency savings, which means having money set aside for unexpected situations. People handle this differently – some save a lot while others live paycheck to paycheck. But there’s a middle ground that’s smart. An emergency fund helps when things go wrong, like losing your income. It’s like having money to cover your living costs while you look for a new way to make money.
At the beginning, an emergency fund is money you set aside for unexpected situations. Many people worry about losing their income suddenly, so having enough money to cover your living expenses while you find a new way to make money is important. It’s like figuring out how long you need before you can replace the money you lost. To begin, we suggest having at least 3 months’ worth of living expenses saved up. For instance, if you spend $5,000 every month, having $15,000 saved is a good starting point. Some careful individuals might even save for up to 12 months, which is when decisions about money become more about what you want personally rather than just financially.
Be careful not to save too much, though, like having 5 years’ worth of emergency savings – this can make your money lose value because of inflation and missed investment opportunities. If you’re saving up for big expenses in the next 12-24 months, like $100,000 for a home down payment, keep that money separate from your emergency savings. Emergency savings are for unexpected things, not planned expenses.
Where to Put your Emergency Savings?
We strongly believe that your emergency savings should not be easily accessible from the regular accounts you use to pay your bills. For instance, we advise against keeping your emergency fund in a checking account that you use to cover your monthly expenses. Instead, consider putting it in a savings or investment account that holds money market funds and requires an extra step to access.
A survey conducted by Bankrate in May 2023 revealed the percentage of American households with emergency savings.
Although the data varies across generations, the overall picture shows that 48% have saved up at least 3 months’ worth of expenses, 22% have no savings, and 30% have less than 3 months’ worth. In summary, everyone is unique, but it’s crucial to establish a baseline that matches your personal goals. We typically recommend having at least 3 months but no more than 12 months of savings. Given higher interest rates, your emergency fund can earn a decent return, ensuring preparedness for life’s uncertainties.
Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser
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