Guiding your life’s biggest financial moments

Personal Finance

Replenishing emergency savings in 2021: taking a realistic approach

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You may have heard that you should save three to six months of essential expenses in an emergency. It’s a good guide, but maybe the last thing you want to hear after a year of emergencies.

For many of us, 2020 has tested our health, safety, courage and basic financial stability more than any other period in recent memory. If you hadn’t already saved money for emergencies, last year probably wasn’t the time to start putting it aside. And if you had, it might have been a great opportunity to tap into your stash.

To that end, a Bankrate survey found that 35% of Americans have less in their emergency fund now than before the pandemic started, while only 13% have more. Only a quarter have saved enough to cover six months of expenses, and a fifth (21%) have no emergency savings. Despite these sobering statistics, more than half (54%) of respondents said they felt at least somewhat confident about how much they had accumulated. These results show that there is a disconnect between what people think we need to have saved and what best practices tell us we must have saved.

Granted, it can be difficult to predict how much money we will need to cover an emergency, whether it is unforeseen medical expenses, helping loved ones in need, or replacing income after prolonged unemployment. These scenarios were all too common in 2020 (and continue to be) and many Americans have found themselves short.

But looking back, many of us may be looking to prepare for the next time we need extra funds. Starting wherever you are today and taking small, practical steps can help you develop healthy and effective savings habits. To help you get started, I’ve answered some of the most common emergency savings questions below.

As stated above, typical guidelines suggest that you should have three to six months of basic living expenses in your emergency fund. Granted, that’s a pretty wide range – so what should you be aiming for? Everyone’s circumstances are different, but if you have children or ongoing medical bills, it may be a good idea to plan for the higher or higher threshold.

Not to mention that the events of 2020 have shown us that certain industries are particularly affected by economic crises – for indefinite periods. If you are in a position vulnerable to market fluctuations, you may need an even higher target.

For most people, basic living expenses include shelter, food, utilities, transportation, and health care. Depending on your family, they may also include childcare or eldercare costs, or education costs. If you have debt, it can also include minimum monthly payments to your lenders.

To determine your emergency savings goal, take an average of how much you spend on all your essentials in a given month and multiply it by six (or nine or 12, depending on how many months you want prepare). Don’t just estimate – check your bank and credit card statements to get an accurate picture of your spending. The totals may surprise you. Of course, a loss of income isn’t the only type of financial emergency, so you may want to build a cushion for home repairs, unforeseen medical events, or the sudden need to travel or relocate.

Coping with your current expenses can be difficult enough without the added pressure of saving for future unknowns. But understand that funding an emergency reserve does not happen overnight; you can set aside smaller amounts over time until you reach your goal. There are a number of strategies you can apply when getting this money.

First, you can include savings for this purpose in your monthly budget. This may require removing some non-essential categories until you’ve reached your goal, but keep in mind that these adjustments can be gradual and temporary. For example, since many of us spend more time at home, money previously spent on meals, entertainment, travel, and travel can instead be used for emergency savings.

Then, if you are working, you can devote part of your premium or tax refund to your emergency reserve. While it may be tempting to treat these dollars as “fun money” or to use them for short-term expenses, your future self may thank you for allocating some of it to your fund for the days of your life. rain.

Another possibility is to start a parallel business. If your friends always say, “You should charge this! When you comment on your hobbies and skills, think about it seriously. There are many online platforms that could help you save money for your time and merchandise.

Finally, if you have invested money, take a look at your overall financial situation to make sure you have an appropriate ratio of cash available in an emergency. A financial professional can be a great resource for providing personalized advice on asset allocation.

You can also combine these strategies to make the saving task more manageable and potentially reach your goal sooner.

Put your funds for rainy days in a liquid account – for example, a high-yield savings account – that you can quickly access in an emergency. It is important to keep this money in its own account, separate from what you use to pay your bills and make day-to-day purchases. That way, you’ll have an easier time keeping it when you really need it.

If you find yourself in the middle of an emergency and haven’t racked up enough savings, the above tips may seem insufficient, too late. Fortunately, there are sources of short-term financing and relief, ranging from loan forgiveness and debt relief to lines of credit and new credit cards with promotional interest-free periods, to help to employers and unemployment.

Life is unpredictable, but just because you can’t predict the future doesn’t mean you can’t foresee the possibility of financial emergencies.

It’s easy to fall into the “status quo” trap, assuming that whatever you’ve been hiding now is enough for the future. However, taking a moment to assess your current savings level against how much you actually need can motivate you to take action and better prepare your finances for future emergencies.

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