A mistake you can’t afford to make when calculating your emergency fund
It could really mislead you.
- You should have at least three months worth of expenses in your emergency savings.
- It is important to consider any expenses you may incur during this time.
- Think about quarterly expenses, as well as your regular monthly bills, and try to anticipate possible future expenses.
Given the number of experts who surveyed recession warnings, a lot of people have emergency savings on their brains right now, and that’s understandable. If a recession hits and the labor market begins to shed jobs, you may have to rely on money from your savings account to stay afloat in the absence of your regular salary.
Now, as a general rule, you should aim to have enough money in your emergency fund to pay at least three full months of essential bills. And for the best protection, it’s a good idea to aim for a savings account balance that can cover six months.
In fact, some financial experts even say it makes sense to have enough savings to cover a full year of bills. Admittedly, this advice came largely on the heels of the massive unemployment crisis that hit in 2020. But it’s certainly not bad advice to follow.
Either way, you may be at a point where you’re trying to build your emergency fund to ensure you’re covered in the event of a general economic downturn. But when you analyze those numbers to see how much savings you need, there’s a pitfall you should try to avoid.
Don’t forget the expenses you don’t pay every month
Most of your bills are probably expenses you pay on a monthly basis – things like your rent or mortgage payment, car loan payment, utility bills and food costs. But you may have expenses that don’t occur monthly, but rather quarterly or even annually. And it’s important to account for these expenses in case you find yourself in a situation where you need to dip into your emergency savings to stay afloat.
Say you lose your job and need your savings to live on for three months. Also suppose that you thought you’ve built up a three-month emergency fund, only to realize that you forgot to add money for your property tax bill, since you only pay it quarterly. Suddenly, you could have a major shortfall on your hands.
This is why it is so important to think about everything of your expenses when calculating your emergency fund. But don’t rely solely on your memory. Instead, comb through bank and credit card statements for the past year — all of them. This way, you’ll be less likely to gloss over a bill that only comes up occasionally.
At the same time, do your best to anticipate new bills. If your child gets braces at the start of the new year, for example, that could mean they’ll have to pay the orthodontist $250 a month once those braces are in place. It’s an expense you’ll want to build into your savings.
Make sure you are prepared for emergencies
If you’re going to make an effort to build an emergency fund, you might as well do it right. Remembering your one-time expenses could mean the difference between having enough cash to weather a financial crisis and having to resort to debt or other undesirable extremes when the going gets tough.
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