- An emergency fund provides important financial protection.
- You can avoid going into debt when faced with surprise costs if you have a healthy emergency fund.
- Many people should consider increasing their emergency fund in 2022.
Does it pay to save more for unexpected expenses this year?
The start of a new year is a good time to reevaluate your financial situation and make sure you're in the best position possible. There are many different money moves you can make to shore up your circumstances, but increasing your emergency fund may be one of the most impactful.
So, should you boost your emergency savings in 2022? Ask yourself these key questions to find out.
How much do you currently have saved?
The first big question to help you decide if you need more cash for emergencies is how much you already have set aside for unexpected costs. Ideally, experts recommend having three to six months of living expenses saved.
If you don't yet have this much money in a high-yield savings account where you can access it easily, chances are good you're vulnerable to ending up in debt or facing other serious financial consequences if something big happens to disrupt your financial life.
If your emergency fund is smaller than the recommended minimum and you don't want to be left at risk of financial disaster because of something like a job loss, medical issue, or unexpected major home repair, taking steps to increase your savings in 2022 could be a smart move.
Has your job situation changed?
One of the biggest reasons to have an emergency fund is to protect against a loss of income. You want to make certain you have money available to pay essential bills and avoid borrowing in the event that you lose your job or your income declines.
If you feel your job is more precarious this year than it was in the past -- perhaps because of continued business disruptions due to the omicron variant of COVID-19 -- then you may want to bulk up your emergency savings.
Have your expenses increased?
Since your emergency fund is meant to provide you with money you need to cover several months of living expenses, an increase in expenditures should lead to a larger savings account balance.
Many people have seen their living expenses rise due to inflation. You may also have higher expenses if you've made a big purchase recently, such as borrowing for a new house or new car or having a child.
You should reevaluate what your crucial expenses are and add more money to your emergency fund if those costs have gone up.
Is there any other reason to believe your income may be more uncertain this year?
A potential job loss may not be the only reason why your income could fall. If you have other reasons to worry, such as the likelihood your childcare will be disrupted due to COVID or concerns about your health, then you may need more emergency savings to see you through.
Do you feel confident you have enough set aside for surprises?
Finally, you should increase your emergency savings if you don't feel confident you're well protected from surprise expenses. Your emergency fund should give you peace of mind, and if it's not doing that, then you owe it to yourself to save more.
If any of these factors apply to you, aim to adjust your budget so you can set aside more for emergencies in 2022. If your boosted emergency fund saves you from financial disaster, you'll be glad you took action.
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