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Having an emergency fund is fundamental to financial health. If you don’t have an emergency fund, you may end up spending more in the long run.
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For example, if you need new tires or a leaky roof, the only way to pay for the repairs may be to go into debt, such as charging your credit card. And when you add in the interest on this debt, the cost of these emergencies can become even higher.
Even worse, if you lose your job and struggle to find work for several months, how will you be able to maintain necessities like mortgage payments?
That’s where emergency funds come in. But half of Americans don’t have more than $500 in their savings accounts, according to a survey by GOBankingRates.
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Is $1,000 enough for emergency savings?
But for many people, even $1,000 isn’t enough for emergency savings. Instead, consider basing your emergency fund on a multiple of your monthly expenses. This means you’ll likely save thousands, if not tens of thousands of dollars.
“You should have three to 12 months’ worth of expenses in a savings account,” says Jaspreet Singh, CEO of Briefs Media and host of the Minority Mindset Show.
Where you fall on that spectrum depends on factors such as your risk tolerance and whether you have family members who are financially dependent on you. If you’re single, you may be able to make do with less money. For example, if you lose your job, you may be able to temporarily move back in with your parents.
“If you’re 25, single, and willing to take a risk, saving a few months’ worth of expenses may be all you need. Now you can be more aggressive with your investments. ” said Singh.
But if you have children yourself, eradicating them may not be so practical. And you may prefer the security of a larger emergency fund.
“If you’re 45, married with kids, and you’re risk-averse, you might want to save six to 12 months’ worth of expenses,” says Singh.
Even if you’re tempted, don’t deplete your emergency savings
Keep in mind that emergency savings should really be for emergencies. Although it may be tempting to reach for this large amount of money if it’s in a savings account, that defeats the purpose.
“This is not money you would use to buy a new TV,” Singh said.
However, you can also put your emergency fund into an account like a high-yield savings account. That way, even if you don’t earn as much as you would if you invested the money in stocks, you can still earn some interest income and keep your emergency fund indexed for inflation.
On the other hand, keeping your money in a bank account gives you a sense of stability without experiencing the ups and downs of the stock market. You never know when an emergency will occur. So if the market happens to go into a down cycle, you probably won’t need to raid your investment portfolio.
GOBankingRates Details
This article originally appeared on GOBankingRates.com: Jaspreet Singh: Here’s the Emergency Fund You Need If You Are 45 With a Family
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