Your Emergency Fund: Why, How and How Much

Feb. 24, 2021   |   Updated 12:04 PM ET

Whether you’re putting money aside for a down payment on the perfect house, gearing up for your dream vacation, or just ensuring that you’re financially secure, saving money is important. Creating and growing your standard savings, however, is only one component of a strong financial plan. You also need to be prepared in case of an emergency.

When unexpected expenses come up, you could put the charge on your credit card. But if you can’t pay it off when your statement is due, you’re left carrying a balance and paying interest. Alternately, you could dip into your general savings, but then that would take money away from a goal, such as a vacation or your retirement.
 
Rather than risking debt or taking money from your savings goals, create an emergency fund. By setting up a separate savings account devoted solely to emergencies now, before a financial emergency hits, you can protect yourself from the financial fallout of unplanned expenses.
 
Here are five ways to get financially prepared for an emergency.

 

1. Track Your Income

 

Building your emergency fund starts with creating a budget, and that means tracking how much money you earn.
 
Record all of your income sources, including your full-time job, your partner’s full-time job, your side hustles, and any other incomes you may have. Add all of your income sources together to determine your monthly income. Be sure to set aside any taxes that will need to be paid and deduct them from the final amount before you begin budgeting.
 
You have several options for recording your income. You can record your numbers with a dedicated Excel spreadsheet or specialized accounting software for easy reference and calculation, or you could simply jot them down in a notebook. However you choose to record your income, it’s critical to know how much money you have to work with when determining how much you can spend and save each month.

 

2. Track Your Expenses

 

The next step to budgeting for your emergency fund is tracking your expenses.
 
You have two types of expenses: fixed and variable. Fixed expenses don’t change from month to month and typically include such payments as:

  • Rent or mortgage

  • Homeowner’s or renter’s insurance

  • Car insurance

  • Life insurance premiums

  • Health insurance

  • Loan payments

Variable expenses, on the other hand, fluctuate each month. They consist of your daily spending decisions and typically include such things as:

  • Groceries and dining out

  • Entertainment (concerts, movies, etc.)

  • Clothes

  • Credit card payments 

Like tracking your income, tracking your expenses can be done manually, entered into a log on your computer, or saved into an app. It all depends on your financial needs and personal preferences.

 
 
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3. Figure Out How Much You Need

Once you have your income and expenses recorded, you’ll need to figure out how much you should put into your emergency fund.
 
Some say that having the equivalent of one to two months of income saved up is enough to cover most emergency needs. Many financial experts, however, recommend that you save up anywhere from three to six month of living expenses. This may seem like a significant amount, but some financial emergencies, such as medical bills or job loss, are expensive. You need to make sure that you’re prepared.
 
According to the US Bureau of Labor Statistics, households in the Philadelphia metropolitan area spent an average of $70,813 per year in 2017 to 2018, or $5,901 per month. With the advice of financial experts in mind, that means the average household in Philadelphia should have at least $17,700 in emergency funds.
 
This may sound like a lot, but it’s money you’ll be grateful to have in the case of illness, injury, car troubles, or sudden unemployment. The rapid spread of the COVID-19 pandemic has been an unpleasant reminder for many that you can never fully anticipate events that will impact your finances. Now more than ever, it’s clear how important it is to set aside enough money to keep you afloat during turbulent times.

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