41% of Americans Worry They Lack Emergency Savings. Here's How to Know if You're All Set
Should you boost your cash reserves?
- A solid emergency fund is one with three to six months' worth of essential living expenses.
- You may want to add in extra money for additional unplanned bills.
The pandemic taught many people the hard way that having an emergency fund is crucial. When the COVID-19 outbreak first hit U.S. soil and millions of jobs were shed overnight, unemployment systems got overloaded, and some filers had to wait weeks for their claims to be processed, leaving them without any sort of income. Those who didn't have money in their savings accounts to fall back on no doubt struggled more than those who did.
Of course, for many people, the pandemic was a wakeup call to go out and start building savings. But 41% of Americans worry they don't have enough money set aside for emergencies,
according to a new survey by Lincoln Financial Group. Here's how to know if you're all set in that area, or if you need to ramp up your savings efforts.
What do your essential monthly bills look like?
Some people settle on a lump sum of money for emergency savings, like $10,000, and assume they're all set. But while $10,000 may be an adequate amount of money for some people's emergency funds, that amount may not suffice for you.
Rather than settle on a round figure, comb through your bank account and credit card statements to see what your essential monthly costs look like. Then, take that total and multiply it by three at a minimum. If you normally spend $3,500 a month on essentials, then a $10,000 emergency fund will leave you a little short, as you'll need $10,500 to cover your basics.
Keep in mind that while your emergency fund should cover essentials, you may want to factor in a few non-essential expenses, too. After all, if you're out of work, is it really reasonable to give up cable, your streaming services, or whatever it is you use for basic entertainment? The key is to figure out which expenses you really can't do without when running those calculations.
Are you a homeowner?
If you own a home, you may want to pad your emergency fund to account for potential repairs. Now here's where you do have the leeway to settle on a lump sum. You may decide that in addition to covering three months of essential bills, you'll add $3,000 to your emergency fund in case you need to replace a major appliance, fix your heating and cooling system, or have roof repairs done. Since there's no way to know what you might spend on a repair, landing on a random but sizable sum is acceptable here.
Do you own a car?
Just as home repairs can become necessary out of nowhere, so too can auto repairs. That's why you should consider adding a lump sum to your emergency savings in case issues arise. You may decide that $500 will cut it, and again, since it's hard to predict what a car repair might cost you, that's fine.
Do you have a high health insurance deductible?
If you have a high deductible attached to your health insurance plan, you may want to set that amount aside in your emergency fund on top of the money you're saving to pay essential bills. Say your plan comes with an annual $1,500 deductible. It pays to try to sock that amount away so you can come up with it if needed.
Ultimately, when it comes to completing your emergency fund, much will depend on the level of protection you're after. Some people are okay with socking away three months of essential expenses and calling it a day, even if they're also homeowners and own vehicles. Think about what will bring you peace of mind and use that to determine your personal savings goal.
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