Should You Increase Your Emergency Savings Due to Inflation? Here's What Suze Orman Thinks
- Having an emergency fund is important in case of unexpected expenses or a surprise loss of income.
- Finance expert Suze Orman generally recommends an emergency fund with eight to 12 months' worth of living expenses.
- She believes it may be necessary to increase your account balance due to inflation.
Listening to her advice could help you be prepared.
Chances are good you've noticed that prices have gone way up on the goods and services you're buying. If you think everything is more expensive, you are not wrong. In fact, inflation has hit a 40-year high and prices in June were 9.1% higher this year compared to the prior year.
With everything getting so expensive, you may be wondering if you should increase the amount of money you have saved for emergencies. Finance expert Suze Orman has provided some helpful advice on this issue. Here's what she thinks.
Suze Orman's advice on your emergency fund is worth listening to
Your emergency fund is intended to ensure you can cover living expenses if something goes wrong with your income. Because of this, Orman believes you should increase the amount you have set aside for emergencies if inflation has caused your expenses to rise.
"If your essential living costs have increased, then you should consider increasing your emergency savings," Orman said. "Take a careful spin through your expenses -- rent, utilities, groceries, transportation etc. -- and I think you will realize your monthly living costs have increased. If that’s the case, then it’s a smart move to increase your emergency savings as well."
Orman used to recommend that you have an emergency fund that covered eight months of living expenses. Thanks to the pandemic, she has also changed this recommendation. "I would be even happier if you made it a goal to build it up to cover 12 months of living costs," she advised.
Since inflation has pushed those costs higher, it only makes sense that you'd need to increase the amount you have put aside. In fact, if you've experienced the full effects of inflation and are now spending close to 10% more on your basic expenditures, you may need to add hundreds or even thousands of dollars to emergency savings to ensure your money would cover you for long enough to get back on your feet after a disaster.
Related:Emergency Fund Calculator
How to increase your emergency fund
Increasing the amount you have saved for emergencies can be a challenge -- especially if you opt to follow both pieces of Orman’s advice: save up enough to cover 12 months of living expenses and take into account the effects of inflation on your living expenses when deciding how much to invest.
But, you can build up your savings account balance over time with a few smart money moves. Typically, the best approach is to adjust your budget and cut out non-necessities temporarily until you have the appropriate amount saved for a rainy day. While it will require sacrifice for a little while, you just have to remember that living on a tighter budget is just a short-term measure until you are fully prepared for any surprises that come your way.
You can also look for ways to temporarily increase your income to get some extra money to bulk up your emergency fund even faster. This can be an especially great approach, since there's technically no limit on how much extra you can earn.
By finding an approach that works for you, you can make sure you are truly ready for emergencies, even now that your everyday expenses cost much more than they did last year.
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