Building a Robust Emergency Fund: Your Financial Safety Net

Everyone faces financial emergencies at some point, and these situations can be as psychologically taxing as they are financially damaging if you’re not prepared. An emergency fund is a crucial safety net that allows you to cope with unexpected expenses or income disruptions. While you hope never to use it, you’ll be grateful for the foresight if you do. But how much should you save, and where should you keep these funds? Let’s dive into the details.

How Much Emergency Savings Do You Need?

The amount you need in your emergency fund depends on your personal financial situation, including income stability, expenses, and the needs of your dependents. A common rule of thumb is to save enough to cover three to six months’ worth of basic living expenses. These essentials include rent or mortgage payments, bills, basic groceries, child care, and similar necessities.

However, you might need to save more in certain circumstances. For instance, if you’re a freelancer, contractor, or someone with a variable income, aiming higher might be prudent. The same applies if you’re the sole earner for multiple dependents. If saving several months’ worth of expenses seems overwhelming, start with a smaller goal. Even $500 or $1,000 can be a strong starting point.

How to Calculate Your Emergency Fund

To determine how much to put in your emergency fund, you need to know your baseline, necessary expenses. Start by reviewing your bank account and credit card statements over several months. Tally up your spending on bare-bones essentials only, such as:

• Monthly rent or mortgage payment
• Utilities and other bills
• Basic food and toiletries
• Child care
• Transportation (gasoline or bus fare)
• Health care and medical bills
• Essential pet care and veterinary bills
• Minimum monthly payments on credit card and loan payments

Look back over at least three months to find a good average for your non-negotiable spending. Add up the expenses for each month, then divide by the number of months reviewed to find your average monthly bare-bones spending. Finally, multiply this average by the number of months you want to cover in your emergency fund.

Emergency Fund Savings Goal Example

Let’s say you want to save four months’ worth of essentials. Review your bank statements for the past three months. Suppose your expenses were $2,800 one month, $3,300 the next, and $2,900 in the third month. Add these amounts to get $9,000, then divide by three to find your average monthly spending: $9,000 / 3 = $3,000. Multiply this average by four to determine your savings goal: $3,000 x 4 = $12,000.

This is just an example, and your income, expenses, and desired coverage period will vary. If your income is inconsistent, consider averaging your expenses over a longer period, such as six months to a year. Also, account for infrequent expenses like tax payments and car registration.

Best Places to Keep Your Emergency Fund

The best place to keep your emergency fund is somewhere easily accessible and where it can earn interest. A high-yield savings account is a strong choice, offering good liquidity and higher interest rates than average savings accounts. Another option is a money market account, which also earns interest and allows a limited number of check and debit card transactions each month, adding convenience.

To ensure consistent funding of your emergency savings, set up automatic transfers from your checking account to your savings account each payday. Determine a weekly or biweekly savings amount that works for you. Let your money grow in your high-yield savings or money market account so it’s there when you need it.

The Bottom Line

Building an emergency fund is foundational to achieving financial security. This money can turn a potential worst-case scenario into a manageable crisis. For example, a job loss or a large repair bill is painful no matter what, but being able to survive without borrowing can help soften the blow.

At O1ne Mortgage, we understand the importance of financial security and are here to help you with all your mortgage needs. Whether you’re looking to buy a new home or refinance your current mortgage, our team of experts is ready to assist you. Call us today at 213-732-3074 to learn more about how we can help you achieve your financial goals.