Why an Emergency Fund is More Important Than Ever
Having an emergency fund is one of the absolutes of financial stability, and it’s proving its worth now more than ever.
For decades now, financial advisors have recommended saving three to six months’ worth of living expenses. This cash cushion gives you something to fall back on whenever something goes wrong, and you have to spend more than you usually budget for in a month.
If you’re like most people, you’ve probably had a few things go wrong in the past few years. Whether you lost your job in a lockdown or had to look after a sick family member, these financial hardships are challenging to endure without an emergency fund.
Despite many claims that the pandemic is over, you aren’t out of the woods just yet. It may still have a lingering impact on your finances. And with economists and financial advisors warning about more tough times ahead, you could face further challenges in the future—challenges that would be easier to weather with an emergency fund.
Table of Contents
4 Timely Reasons for an Emergency Fund
Below, you’ll find four reasons why an emergency fund is crucial right now, followed by an ultimate budgeting guide to help you beef up savings.
1.It Needs a Fill up Right About Now
After nearly three years since the start of the pandemic, your savings may be on the low side. About 19% of American households lost all their savings during COVID-19, according to a 2021 poll conducted by NPR, the Robert Wood Johnson Foundation, and the Harvard T.H. Chang School of Public Health.
While many Americans are on their way to recovering what they lost, some are still behind on what they need. The most recent Magnify Money Savings Index reveals only 26% of Americans say they’re saving for emergencies.
2. Inflation is Keeping Prices High
While inflation may have dropped from the summer’s peak, it’s more than twice the long-term average. Hovering just over 8%, inflation still has its claws in most consumer goods and services, bringing up the costs of everything in your budget.
With everything taking up more of your monthly paycheck, it can be harder to sock away as much in savings as you used to in the past. To make matters worse, unexpected expenses and repairs will cost more due to inflation. This one-two punch underscores the need for better savings.
3. A Recession May Be on its Way
Most economists agree that a recession is likely in 2023. This means the overall economic activity in the country will slow down, causing some businesses to close and people to lose their jobs.
There’s no guarantee you’ll face job loss in the next year, as a recession impacts people’s lives differently depending on your career and financial stability.
The size of your emergency fund plays a part, too. After all, having a cash cushion can help you smooth over periods of lost wages or illness easier should they occur.
4. Supply Chain Issues Will Continue
Economists also believe the supply chain issues will continue into next year. These disruptions will further complicate inflation and a possible recession. Not only will you see empty store shelves, but you’ll also pay higher prices for items that are in stock.
How to Build a More Solid Emergency Fund
With so many financial challenges on the horizon, having a well-stocked emergency fund will help you feel more confident about the future.
But creating one that can stand up to emergencies may be daunting. How can you save six months’ worth of living expenses?
Short answer: you need a budget. For more guidance in that regard, keep reading.
1. Track Your Cashflow
Before you can start saving, you need to understand where your money goes each month. Make a list of your essential expenses, updating them to reflect today’s current costs with inflation.
The sum of these expenses represents your base needs, and your income must cover them. However, few people can live with just the essentials. In a separate list, note all the other spending in a typical month.
2. Make Cuts Where Necessary
Once you add in all your spending to your essentials, how much leftover cash do you have? If you’re lucky enough to have extra money, this should go towards your savings.
But let’s be honest, most people aren’t so lucky. You’ll have to go through your list of non-essentials to see what you’re willing to sacrifice to free up savings.
3. Consider Making Big Moves
For those already living on a tight budget, you might not have a lot of non-essentials to cut. In that case, your essentials are taking up too much of your income, and there’s only two solutions to that.
One: Look to see what you’d have to do to change the essentials. Can you move to a smaller home in a cheaper neighborhood? Can you save energy to reduce your utilities or drive less? Can you negotiate prices on insurance, phone bills, and Internet packages?
Two: You might need to get a better job or a side hustle.
Of course, you might not be able to move overnight or get a job right away but thinking about these big changes can set you on the right path.
Bottom Line:
An emergency fund is never out of fashion—it’s always a critical part of your budget. However, having this cash cushion may have more relevance in volatile times, more so than ever. Remember these tips to help you save more—whether you’re refilling a well-used emergency fund or building one from scratch.
