The events since Covid closed down everyday life in March of 2020 have reinforced the importance of having a safe, liquid backstop in case you have disruptions to your income or encounter unexpected expenses. We all had friends or families who were impacted by job loss or lost income during the Covid shutdowns in the spring of 2020. Recently we have seen increased layoffs here in the Bay Area in the tech industry and other businesses. How many of your current expenses can’t be cut if you or your significant other loses their job?
How Much Should I Save?
You want to have at least three to six months of non-discretionary expenses set aside to be prepared for unforeseen circumstances that may arise. The key with this emergency backstop is you won’t have to put expenses on high-interest credit cards or pull money out of retirement accounts, which could result in early withdrawal penalties and taxes.
Take the time to examine your current income sources and see how they stack up against your current expenses. Is your compensation tied to incentives? How much does your monthly income swing? If you are a dual-income home, you might be able to have less on hand since not all household income will disappear if one of you loses employment. Having that money parked on the sidelines can also help with your peace of mind in these stressful times, even if you don’t have to touch it.
An emergency fund’s main purpose is to protect you during a job loss, but it can also be used for small emergencies like auto repairs, a busted water heater, unforeseen medical bills, or even a sick pet. Emergencies like those listed can cause a great deal of mental and emotional stress. You don’t want to amplify that stress by trying to figure out how to pay for a financial setback. If you have to dip into your emergency fund for any reason, be sure to replenish it as soon as possible.
An emergency fund should be siloed from your other investment, checking, and savings accounts. Having a separate dedicated emergency account removes the temptation to dip into it for non-emergencies like a vacation.
Emergencies happen to everyone, and they are not selective in their timing. While you can’t predict the next emergency in your life, you can prepare for it. Be prepared for the curveballs in life by having 3 to 6 months or more in savings set aside for essential expenses.
Emergency Fund Calculator
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