According to the Federal Reserve, four out of 10 Americans couldn’t cover a $400 emergency expense without going into debt. Setting aside cash for unexpected events is important for long-term stability and can also give you some peace of mind.
The rule of thumb is to save at least three to six months of living expenses in an emergency savings fund. The amount of emergency cash you should budget for depends on your lifestyle, committed expenses, household size and income.
How much emergency cash do I need?
Here’s a simple way to figure out how much emergency money you should budget:
Step 1: Figure out the total necessary expenses you pay each month.
These expenses include everything from your rent or a mortgage payment, utilities, car payments, gas, groceries, phone bill and any other necessary monthly payments. For this example, we are going to assume $2,000 in monthly expenses.
Step 2: Pick the number of months you would like this emergency fund to cover.
Although it’s recommended to save enough to cover at least six months’ worth of expenses, we are going to use three months for this exercise.
Step 3: Choose how long it will take to fund an emergency savings account.
This number is based on the amount of money you intend to save per month. For this example, we will say that we want to reach our emergency money goal in three years.
Step 4: Do the math.
- Multiply monthly expenses by the number of months the emergency fund will cover.
$2,000 * 3 = $6,000 emergency cash needed
- Multiply the number of years you’ll save to reach your emergency savings goal by 12, to figure out the number of months you’ll need to fund the emergency account.
3 * 12 = 36 months to fund savings goal
- Divide the emergency savings goal by the number of months needed to fund your savings goals to determine your monthly contribution.
$6,000 / 36 = $167 monthly contribution
In this example, you need to save $167 every month for three years to have $6,000 in the emergency savings. This doesn’t account for any interest accrued from your savings account.
Where should I stash emergency cash?
Now that you know how much money you need to save, now you’ll want to decide where to save it. It’s smart to start a separate account for your emergency fund to avoid the temptation of dipping into it.
A few safe options for storing emergency money are:
- Savings Account: A savings account will allow you to access your money easily in case of an emergency and offers higher dividends than a typical checking account.
- Money Market Account: This type of savings account, also called an MMA, is like a cross between a savings and checking account in that you earn dividends and can withdraw money up to six times a month.
- Certificates: Another option is to tie up some of the money you’ve already accumulated in your emergency savings into a certificate. This way, the money you can afford not to access for a while earns a higher dividend rate. You’ll get a guaranteed rate of return based on your initial deposit and term selected. You may also consider laddering certificates, so they mature on different dates, giving you access to your money at staggered intervals. Visit our certificate calculator to see how much you can earn.
Emergency savings strategies
Depending on your situation, it may be difficult to set aside money into an emergency savings account. Here are a few strategies to help you save more for a rainy day:
- Make savings automatic: Use direct deposit to automatically set aside a portion of your paycheck into your savings account or MMA each month.
- Evaluate and reduce monthly expenses: Look at non-essential costs that can be substituted with a less expensive alternative or cut out completely. If you tend to buy a fancy coffee every morning, try making coffee at home or wait to drink the coffee at work. Try cooking more at home and eating out less. Your emergency savings account will thank you later.
- Re-calculate your budget each year: Expenses and circumstances change in life, so make it an annual task to make sure you’re saving the right amount.
A fully-funded emergency savings account gives you the ability to deal with problems in a level-headed manner and helps you avoid racking up credit card debt or taking out a loan. This approach will enhance your lifestyle both financially and emotionally, giving you peace of mind during the times you need it the most.
Contact a TCU representative to get advice on the best savings accounts for your emergency fund.
Disclaimer: This article is for educational purposes only and doesn’t constitute tax, legal or accounting advice. Please consult with an attorney or tax professional for guidance.