The conventional advice of how much money you should have saved in your money Emergency fund It used to be three to six months of living expenses.
Then the coronavirus pandemic hit.
As millions of people lost their jobs and blew up their savings, some financial experts began to question the old emergency fund recommendations. Said Suze Orman People with stable jobs should work to save 12 months on the cost of living. Napkin Finance founder Tina Hay is alive Questions and Answers with The Penny Hoarder, said the pandemic showed that people really need a year’s worth of savings on emergencies.
Given the difficulty many find in saving three to six months in costs, it can seem almost impossible to save a year. Should a 12 month emergency fund really be the goal, and how do you even reach that benchmark?
The pros and cons of a 12 month emergency fund
According to the US Bureau of Labor StatisticsThe average duration of unemployment was around 30 weeks in March 2021. That means three to six months of savings wouldn’t be enough if you relied on it alone to get by.
A larger emergency savings target – like a 12 month emergency fund – allows for greater security that you will not run into financial hardship if you have been without income for an extended period of time.
Take a look at your individual situation. If you work in an area where it’s difficult to find new opportunities quickly, you may want to save more than six months in expenses. Relying on only one source of income, a year’s worth of living expenses savings can mimic the financial safety net of a double-income household.
Having additional savings can also help you avoid going into debt or falling back on bills when faced with a medical emergency or other major expense.
Of course, keeping 12 months of expenses in an emergency fund may not be beneficial or realistic for everyone.
This savings goal can take time to reach, and as you work towards it, you can move away from other financial priorities like paying off debts or saving for retirement.
If you only pay the minimum balance for high-interest credit card debt, you will hardly affect the balance. If you postpone pension contributions, you are missing out on the chance of compound interest making your money grow.
Is a 12 Month Emergency Fund Right For Me?
If you’re looking for extra security to weather a future financial crisis, a 12 month emergency fund can help.
Saving a year’s worth of expenses is a smart choice if the thought of only having enough money for six months is worrying you. The fact is, the three to six month emergency fund policy is just a recommendation, not a hard and fast rule.
However, if you are living from paycheck to paycheck, have significant debt, or have not yet started saving towards retirement, focusing on a 12 month emergency fund may not be your best move right now.
There may be other reasons why a 12 month emergency fund doesn’t make sense to you. When you have great health, car, and home / renter insurance with a low deductible, you can rest assured that you will be able to financially handle any emergency. Knowing that you can crash with a friend when you can’t pay the rent can ease the pressure of saving so much. When you have assets that you could easily liquidate, you may not need that much cash to spend.
This will save you 12 months of living costs
If a 12 month emergency fund is a financial goal to work towards, it may take some time, but it is quite achievable.
First, you want to calculate what your actual savings target is. You don’t just take your annual salary and make it your goal. Your 12-month emergency allowance should be just enough to cover your absolute cost of living during this period.
If you haven’t made one up Bare bones budgetTake the time now. This shows you your essential monthly costs – without all of the things you could do without. Multiply your monthly bare bones spend by 12 and you get your savings goal.
If you currently have emergency saving money, subtract that amount from your goal. Then you know how much you still have to save.
Next, you need to look at your regular monthly budget (not the bare bones version) and find out how much you can realistically put aside each month without living like a curmudgeon. Cut out everything Fun spending money will only make it unbearable to achieve your goal.
Also, remember that you need to balance this focus on savings with other financial priorities.
As you review your budget, look for areas where you can make cuts. Do you have subscription services that you don’t use? Can you Save money on groceries? Are you Overpayment for cell phone service? Negotiations with service providers isn’t successful 100% of the time, but it doesn’t hurt to ask.
When you’ve calculated how much it is convenient to save each month, set up automatic transfers to your savings account to make the process hassle-free.
After you review where you can save, take the time to brainstorm how you can make extra cash for your 12 month emergency fund. Have items around the house that you can sell online? Can you take on a side appearance or part time job? When is the last time you spoke to your manager about a raise? Sometimes Securing new jobs is the best way to get a significant raise.
Put all of that extra cash – plus any hurdles like tax returns or economic checks – in your savings account. Make sure your emergency savings are in one High yield savings account So you earn more interest.
It may take a few years or more to meet your 12 month savings goal. This is not an easy short term goal, but if you stay consistent in your efforts and do so Only make withdrawals when a real emergency arises‘You will get there.
Nicole Dow is a senior writer at The Penny Hoarder.
This article originally appeared on www.thepennyhoarder.com