Christ Yoder
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It took a pandemic to convince Americans to take saving money seriously.
For years, Americans have set aside 7-8% of their income. In a knee-jerk reaction to COVID-19, people have been hiding money at an all-time high. According to the United States Bureau of Economic Analysis, in April 2020, the personal savings rate exploded to over 33%.
That rush for emergency savings funding has since waned, but has still been about double the 30-year average in recent months.
“The pandemic has certainly presented a whole new set of challenges, both financial, personal and professional,” says Elliot J. Pepper, a certified public accountant and certified financial planner in Baltimore. The need for an emergency fund has become even more acute so that unexpected expenses don’t turn into costly credit card or consumer debt.
Here’s how to decide how much extra you might need to save and how to save it.
Determine the size of your emergency fund
If you only had three months of rainy day savings, Pepper recommends increasing that to six; if you had a cushion of six months, increase it to nine.
The traditional advice of having three to six months of living expenses is a “good place to start,” according to Natalie Slagle, CFP in Rochester, Minnesota. She says a couple with one source of income should be looking at six months of living expenses or even more.
Jovan Johnson, a CFP based in Decatur, Georgia, prefers to store 12 months worth of cash for necessities.
Rules of thumb are just the start
Many advisers caution against relying solely on these three- or six-month-old ready-made recommendations. It’s best to consider your actual monthly expenses, they say, and figure out what kind of unexpected situations you’re preparing for.
Logan Murray, a financial planner and tax preparer in Tempe, Arizona, suggests thinking about the “likelihood and magnitude” of events like losing a job. “How sure are you of finding another job in your industry in the short term before your emergency fund runs out? Murray asks.
What if your spouse lost their job, would you have enough leftover income or did you have to rely on the fund?
Factors that could affect the size of your emergency fund are another consideration, says Minneapolis-area financial planner Mark Struthers.
You may need more emergency savings if:
• Only one spouse works.
• You have children.
• You own a small business.
You may have more flexibility if:
• You have other assets you can leverage, such as access to a 401(k) loan or Roth IRA. Withdrawals of your qualified contributions and distributions from a Roth are generally tax and penalty free, Struthers notes.
• You have a support system nearby, such as parents or siblings.
• You have disability or life insurance.
How to Make an Emergency Fund a Savings Priority
Pepper urges customers to determine an appropriate emergency fund balance, divide that number by a reasonable amount of time, and set up an automatic transfer from their check to a savings account until the goal is reached. .
“It forces people to think of saving as part of their day-to-day expenses instead of something that’s more of an afterthought,” Pepper says.
Where to keep emergency savings
“I recommend that customers put this money somewhere easily accessible and secure, such as an FDIC-insured online savings account. This money should not be put at risk,” Johnson said.
Struthers recommends a three-pronged strategy, placing emergency savings in three different accounts and accessing them in this order, as needed:
• Saving account.
• A money market account. (It has “a higher return and is safe, but with a bit more risk,” he says.)
