Having an emergency savings account is the best way to avoid a financial crisis. But how much do you really need in savings? While that is debatable and dependent on your individual situation, there is a threshold everyone should aim for.
3-6 months’ worth of expenses
Let’s just jump right into the answer. In order to prevent a financial crisis – missing/falling behind on bill payments and/or accruing debt – you should shoot for saving at least 3 months’ worth of your monthly expenses. With that said, don’t stop at 3 because 6 months’ worth is even better. In case of a drastic event like a job loss, it can take time to find a job and even then there’s no guarantee your earnings will remain the same as before.
Create a budget and determine what you’d NEED to spend your money on. Be sure to prioritize starting with housing/utilities, food, insurance, etc.
For some people, 3 months’ worth of expenses could be $10,000, which seems daunting to save that much when you’re starting at zero. However, you have to start somewhere; therefore, try to set aside 10% of your income into savings. If that’s not feasible, figure out what you can afford to set aside and start right away.
If you find that you don’t have enough wiggle room in your budget to save very much or anything at all, you need to make room. Find a few places where you can make reductions or cuts then pay your savings fund with that money.
Although it might be tough to cut spending, it’s worth it to help you be more prepared and to reduce worries about money.
Let it be
Savings is not meant for use if you run out of money and you really want to go out to eat or buy shoes. Treat savings like it’s untouchable unless it’s really needed. That’s the only way you’ll ever reach your savings goal. The best way to accomplish this is to set up a separate account and have automatic deposits monthly from your paycheck.
Find savings boosters
Again, going from $0 to $5-$10,000 can seem impossible. But it can happen with planning and effort…and a savings booster here and there. Use your tax refund, bonus at work, garage sale earnings, side hustle or overtime earnings, etc. Take that extra money and add it to your emergency fund and watch it grow.
You’ll be prepared
Even if there is a bump in the road along the way and need to use some of your savings for a smaller crisis, that’s okay. That’s exactly what that financial safety net is for because hopefully you’ll never have to go through a major crisis like losing your job. But that’s why you keep saving even if you have to use some of that money; because life can change quickly.
So there you have it: 3-6 months’ worth of expenses set aside in savings will help you avoid a financial crisis. Not only that, even having $1,000 in savings can prevent having to accrue debt. Plus, you won’t have to worry about how you’ll pay for that washer breaking down. The key is to make savings a habit and treat it just like a bill you have to pay each month.
If credit cards are making it difficult for you to save, you would benefit from financial counseling. Call LSS at 888.577.2227 for your free session or GET STARTED ONLINE at your convenience.
Author Elaina Johannessen is a Program Director with LSS Financial Counseling.