Conventional advice on how much money you should have saved in emergency fund The value of living expenses was three to six months.
Then the coronavirus pandemic struck.
With millions of people losing their jobs and their savings exploding, some financial experts are beginning to question the recommendations of the old emergency fund. Suze Orman said People with stable jobs must work to save 12 months of living expenses. Napkin Finance Foundation, Tina Hay, live Q&A with The Penny HoarderThe pandemic has shown that people really need a year of savings for emergencies, he said.
With so much struggling to save up to three to six months on expenses, saving a year’s worth of value can seem nearly impossible. Should a 12-month emergency fund really be the goal, and how do you reach that benchmark?
Pros and cons of a 12-month emergency fund
according to US Bureau of Labor Statistics, the average duration of unemployment as of March 2021 was about 30 weeks – meaning that three to six months of savings wouldn’t be enough if you were relying on it on your own.
A larger emergency savings goal — such as a 12-month emergency fund — allows for greater peace of mind that you won’t be in financial straits if you find yourself without income for an extended period of time.
Consider your individual situation. If you work in a field where it is difficult to find new opportunities quickly, you may want to save more than six months in expenses. If you rely on only one source of income, saving on living expenses for a year can mimic the financial safety net of a double-income family.
Having extra savings can also help you avoid getting into debt or defaulting on bills if you encounter a medical emergency or other major expense.
Of course, hiding 12-month expenses in an emergency fund may not be beneficial — or realistic — for everyone.
It can take some time to reach this savings goal, and working toward it can take a back seat to other financial priorities, such as paying down debt or saving for retirement.
If you only pay the minimum balance on high-interest credit card debt, it will hardly affect the balance. Deferring retirement contributions means you’ll miss the opportunity to let compound interest grow your money.
Is a 12-month emergency fund right for me?
If you’re looking for extra security to weather a future financial crisis, having a 12-month emergency fund can help provide that.
Saving on expenses for a year is a wise choice if the thought of having enough money for a six-month extension makes you uncomfortable. The truth is that a three- to six-month emergency fund guideline is just a recommendation, not a hard rule.
However, if you’re living on paycheck to paycheck, have big debts or haven’t started saving for retirement, maybe focusing on a 12-month emergency fund isn’t the best move right now.
There may be other reasons why a 12-month emergency fund may not make sense to you. Having premium health, auto and home/renters insurance with low discounts can give you the peace of mind that you will be able to handle any financial emergency. Knowing that you can break up with a friend if you can’t pay the rent may remove some of the stress of having to save just as much. If you have assets that you can easily liquidate, you may not need to have the same amount of cash on hand.
How to save up to 12 months of living expenses
If the 12-month emergency fund is a financial goal that you’d like to work towards, it may take some time, but it’s definitely achievable.
First, you’ll want to calculate your actual savings goal. You don’t take your annual salary and you achieve that goal. Your total emergency fund for 12 months should only be enough to cover your absolute basic living expenses during that time frame.
If you haven’t found a file bare budgetTake the time to do this now. This will show you the basic monthly costs – getting rid of all the things you can do without. Multiplying your regular monthly expenses by 12 will give you a target savings goal.
If you currently have money in emergency savings, subtract that amount from your goal. Then you will know how much you still need to save.
Next, you need to look at your regular monthly budget (not the regular version) and see how much you can realistically set aside each month without living as a miser. cut everything fun spending money It will make reaching your goal painful.
Remember, too, that you will need to balance this concentration of savings with any other financial priorities you have.
As you check your budget, look for areas where you can make cuts. Do you have subscription services that you don’t use? can you Save money on groceries? Are you Overpaying for cell phone service? Negotiating with service providers It’s not successful 100% of the time, but it doesn’t hurt to ask.
Once you calculate how much you can comfortably save each month, set up automatic transfers to your savings account to make the process easy.
After you check where you can save, take time to think about how you can earn extra money to go into your emergency fund for 12 months. Do you have things around the house that you can sell online? can you Take in the side party Or a part time job? When is the last time for you I spoke to your manager about an increase? sometimes New job insurance It is the best way to get a big bump in salary.
Put all that extra money — plus any windfalls like tax return money or stimulus checks — into your savings account. Make sure your emergency savings are in High yield savings account حساب So you will earn more interest.
It may take two years or more to reach the 12-month emergency fund provisioning goal. This is not an easy goal in the short term, but if you keep your efforts consistent and Only withdraw funds in the event of a real emergency, you will get there.
Nicole Dow is a senior writer for The Penny Hoarder.