Expect the Unexpected: Building An Emergency Fund for Financial Savvy Individuals
Sun, April 11, 2021

Expect the Unexpected: Building An Emergency Fund for Financial Savvy Individuals

 

Financial advisors generally advise you to save at least three to six months’ worth of expenses to build up your emergency fund in case of job loss, an unexpected medical bill, or when your car needs to be repaired, stated Kathleen Elkins of CNBC Make It, a website dedicated to publishing content on helping readers how to earn, save, and spend their money. But does this hold true during the COVID-19 outbreak, in which millions of people are unemployed or laid off?

Employee Participation On Rainy Day Programs (2018)

35% of employees were very likely to participate in an employer-based rainy day savings program, 35% answered “somewhat likely”, 16% said “not too likely,” and 13% said “not at all likely,” according to a report by Catherine Harvey, David John, and S. Kathi Brown of AARP, a non-profit, non-partisan organization in the US.

When asked to explain why they would be likely to enroll in the benefit, 18% said “to save money." 16% said it is for emergencies and unexpected expenses, saying that large expenses would be less stressful. 16% said they won’t see or handle the money and 12% said “it’s automatic and easy to set up.”

Regarding their reasons for not participating in the program, 26% said they have already saved on their own, 21% said they would be able to do it by themselves,  20% answered “not need or wanted,” and 12% cited insufficient income/uncertain income.

 

 

Survey On Covering Unexpected Bills (2020)

The January Financial Security Index released by Bankrate, a consumer financial services company, revealed that 41% of US adults would cover the cost of $1,000 car repair or emergency room visit using their savings, reported Amanda Dixon of Bankrate. Conducted from December 30, 2019 to January 5, 2020, 16% would finance the bill with credit card/pay off over time, 14% would borrow from family or friends, 13% would reduce their expenditure on other things, 7% would take out a personal loan or do something else/don’t know what to do.

The higher a person’s household income, the more likely they will use savings to cover for unanticipated costs. The report found that this is true for 59% of households earning $75,000 or more each year. 45% of men and 38% of women were more likely to report drawing money from their savings in case of unexpected circumstances. 36% of younger millennials would use their emergency funds to pay $1,000 unlike 41 to 44% of older people who shared the same sentiment.

28% of US adults said that they or an immediate family member had major unanticipated expenses within the last 12 months. College graduates (33%) were more likely than high school graduates or dropouts (21%) to report that they or their families had unexpected costs within the last 12 months. Parents (34%) were more likely than non-parents (26%) to state that they had a huge bill a year prior they did not expect to pay.

When asked how much the largest unexpected expense was that they or an immediate family member faced last year, 29% said $5,000 or more, 26% said $999 or less, 24% mentioned $1,000-$2,499, and 18% answered $2,500-$4,999. Millennials spend an average amount of $2,951 unlike Generation X ($3,978), baby boomers ($3,978), and the Silent Generation ($4,091).

 

 

Saving More The Less Stable Your Job

If you have a steady job or far out from retiring, you can keep saving three to six months’ worth of expenses in your emergency fund, stated Carrie Schwab-Pomerantz, a certified financial planner. "You’ll have a nest in case you need to dip into your emergency fund, however, you won’t have so much in cash that you lose the opportunity for growth,” she added.

If your income fluctuates due to commissions, overtime pay, or other external factors, it is recommended to save at least six months’ (or more) worth of expenses. Having a minimum of three months’ worth of expenses is important in times of economic and financial disruptions.

Kelly Crane, another financial planner, explained, “Get real about the chances of losing any or all of your income and plan for at least three months of disruption to that income source.” We don’t know when such disruptions will end, Crane said. She added that the outbreak could impact some industries in a few weeks to several months.

You Should Have More Cash If You Are Inching Closer to Retirement

Schwab-Pomerantz said you should have a bigger cash cushion the older you get. Hence, you should have at least 12 months’ worth of living expenses in your emergency fund. She added that retirees should have two years’ worth of cash. “The nature of the stock market is that it goes up and it goes down,” Schwab-Pomerantz said. You will never know when stocks will go up or down hence it is important to be prepared for anything that comes your way.

Is There Really A Right Amount?

It varies between person to person and it also depends on certain factors such as your job, age, your plan to retire, and your tolerance for risk. Consider asking yourself: “How much do I need to feel comfortable.”  However, for lower-income households, you will need at least $2,467 saved in your emergency fund, which is a realistic amount these households can work toward, said economists Emily Gallagher and Jorge Sabat in their 2019 report “Rules of Thumb In Household Savings Decisions,” cited Kathleen Elkins of Make It CNBC.

But this does not mean that $2,467 is the optimal savings level you should try to achieve. Gallagher said, “Our results don’t speak at all to achieving longer term financial goals, like paying for college or affording a house.” Although the data does not speak to middle- or higher-income households, the rule should also work for these housholds. Crane said, “Your comfort level of easy-to-access cash is emotionally important now.” This refers to the amount of money that you personally need to access quickly to make your feel comfortable.

 

 

Where Should I Keep My Emergency Fund?

You can keep your emergency fund in a checking, savings, or money market account. Your rainy day fund will be kept separate from your other assets, ideally speaking— and it will not be that accessible too. If you keep your emergency funds in your regular funds, then you are more likely to spend it for non-emergency items or circumstances. But when you store it an account for emergency purposes, you can be assured that the money is there when you need it.

Having an emergency fund helps people cope with unexpected circumstances such as economic disruptions. There’s no right amount considering that it depends on the individual’s needs and financial goals.