Emergency fund, rainy day fund, whatever you call it, it’s important to know how much money you should have set aside in case something unexpected happens. While it may be somewhat of a moving target – the golden rule has always been to have at least 3 to 6 months’ worth of expenses saved up – 6 months especially if you have a family.
What if I told you that almost a third of Americans are still at square one, with 29 percent of people having no emergency savings? Surprised? With many people trying to pay down student loans, credit card debt, etc., they forget the importance of putting money aside for those unplanned and often emergency situations.
Back to that moving target – while the golden rule savings goal might be as little as three months it could actually be as much as two years of expenses. There are several factors that you should take into consideration.
Job security. The less stable your job or income source is, the more money you should have in your emergency fund. If you freelance, are an entrepreneur, or work on commission, you should plan for a bigger cushion.
Skill marketability. If you work in a highly specialized area that has few job openings in the field, you should pad your emergency fun just in case you find yourself unemployed. Your job search may take longer than the norm.
Health issues. If you have health concerns, you might want to err on the side of caution when it comes to your emergency fund. If you need to take a leave of absence from work or find that your insurance won’t come some medical bills, having that extra cushion will come in handy.
If you own a home. Unexpected repairs always come at the worst time. Having a safety net to fall back on in case you need to fix some plumbing, repair your roof, or replace an appliance can come in handy.
Other assets. If you have other means that you could easily tap into and pay back, you may be able to get by with less of a cash emergency fund. Access to a home equity line of credit might supplement savings or if you have investments that are easily accessible.
Peace of mind. At the end of the day it all comes down to your comfort level. Some people prefer 6 to 12 months of expenses set aside. If you are a retiree or close to retirement, you may feel safer having an even bigger cushion.
Once you get your savings account balance to a level you feel comfortable with, you can consider funneling extra money into higher return options, like an IRA or CD. With your savings account there to protect you in case of emergency, you won’t risk falling back into expensive debt in the future.
If you have questions on how Litchfield Bancorp can help you in your savings goals – give us a call or stop in!
Vice President, Lakeville Manager