Americans must rethink emergency fund guidance as inflation soars

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With inflation at the highest level in 40 years, your emergency fund has just been elevated to “stat” status. It’s always been necessary to have a rainy day fund, because it’s not a matter of if you will have a financial emergency, but when. For millions of Americans, this when is now.

Inflation soared to 9.1% in June, according to the latest Consumer Price Index report released by the Bureau of Labor Statistics. This was the largest 12-month increase since the period ending in November 1981. Gasoline, housing and food costs were the main factors in the rise in consumer prices.

As with any economic downturn, the better-off may complain, but they can still weather rising prices without any significant pain. Many more Americans will experience financial malaise (some will suffer more than others) and establish new austerity measures, such as cutting back on streaming services, fewer dining out, or canceling vacation plans. And then there are the less fortunate who are already struggling. They will see their precarious situation worsen.

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As inflation continues to soar, Americans need to rethink how they manage their emergency savings, says Kia McCallister-Young, director of America Saves, an initiative of the Consumer Federation of America.

She provided advice on what people should do, whether they were struggling, had savings, or had a well-funded emergency account. Many of us are still recovering from the pandemic, so understanding where you fit in these three categories is the first step in figuring out what you can do,” she said in an interview.

You’ve no doubt heard the standard advice to aim to save three to six months of living expenses.. To do this, you start by adding up your monthly expenses, including everything from your rent or mortgage payment and car loan to average grocery and utility expenses. If your minimum monthly expenses total $3,000, having an emergency fund for three months would mean saving $9,000.

“The reality is that it can seem daunting to many and impossible to some,” McCallister-Young said. Instead, America Saves recommends starting with a goal of $500. Even a modest amount in times of financial crisis is better than nothing.

An easy way to achieve this initial goal is to save automatically by diverting a portion of your deposited paycheck directly into a dedicated emergency savings account. Or you can ask your financial institution to make a direct deposit for you.

Finding money may require more cost cutting or taking on a second job. There are many employers looking for workers. Employers added 372,000 new positions last month, the Bureau of Labor Statistics reported.

“Private-sector employment has recovered net job losses from the pandemic and is 140,000 higher than in February 2020,” the agency said. “In June, notable employment growth occurred in professional and business services, recreation and hospitality, and health care.”

Unemployment rate held steady at 3.6% in June

You were fine. You’ve managed to save a few months of living expenses or even hit that six-month threshold. But rising prices have forced you to dip into your emergency fund.

If you haven’t already, do an assessment before all the savings run out, McCallister-Young said. “Now is the time to get a clear view of your finances,” she said. “Look at your recent income, monthly expenses, and savings contributions, then adjust where you can and do what makes sense at the moment.”

America Saves can help you dig deeper into your budget. The organization is hosting a free virtual workshop on July 28 at 2 p.m. EST. Information about the workshop can be found at AmericaSaves.org. Search for “6 Steps to Establishing a Spending and Saving Plan”.

Take advantage of free financial coaching and advice through America Saves, which can help you identify resources to help you in your situation. “We really want low-to-moderate income people to benefit because we match them with someone in their local community who has access to these resources,” McCallister-Young said.

Despite rising inflation, you have more than enough in your rainy day fund. You may have bloated your savings during the pandemic because you couldn’t spend. Or you have greatly reduced your expenses because you could work from home and perhaps still be telecommuting.

If you belong to this group, you may be able to afford to increase your savings. During an economic downturn, fortunes can change quickly. If you are doing well, opt for more savings rather than less savings. If you are a high earner, you may need an emergency fund with 12 months of living expenses. If you lose your job, it may take just as long to find a similar paid position.

If you’re doing better than most and your savings cushion is strong, consider helping others. “These people are also well positioned to take those savings and reinvest them in their local nonprofits, charities and organizations that provide financial relief and support to those who are feeling the greatest effects of inflation,” said said McCallister-Young.

She added something else during our conversation. Employers could also help their workers increase their savings, and not just with a pay rise. Companies should ask themselves what they can do to alleviate some of that financial stress on their workers, McCallister-Young said.

“I just wanted to tell these companies that this is part of caring for your people, recognizing that inflation is now at an all-time high,” she said. “Committing to work every day, whether you take public transport or drive, is currently affecting your workforce’s bottom line.”

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