The normal unpredictability of everyday life is enough reason to store away some reserve cash for emergencies, but with this year’s market volatility, high inflation, and rising interest rates, setting aside some funds for a rainy day is more important than ever.
No matter if you’re single or partnered, employed or retired, young or old, experts say you need to have a stash of cash handy in the event of a life emergency.
A sudden accident, surprise car repair, unforeseen illness, or unpredicted job loss can obliterate your day-to-day cash flow if you aren’t prepared.
Although some emergencies can’t be avoided, having tangible savings in reserve can help carry you temporarily while you manage these unexpected life events.
According to financial experts, how much cash you need to have on hand – from three months up to three years of expenses – varies depending on your individual or family situation.
Partnered/Dual Income Households
The general consensus for couples who are both working and sharing household costs is storing a minimum cash reserve of three months but, if possible, six months of living expenses.
Three to six months of reserves is necessary if you and your partner:
- are relatively healthy
- don’t have much debt
- have a low cost-of-living
- have stable jobs and could easily find a new one if either of you lose your current one
- have no dependents relying on your income
Wells Fargo recommends putting a small amount away each week or two to build up to that goal. You may also want to consider adjusting the amount based on your bill obligations, family needs, job stability, or other factors.
Accessibility is also key so experts advise that emergency savings should be placed in an account that is easily accessible, so you do not incur early-withdrawal penalties as you would with an account such as a certificate of deposit (CD) or Individual Retirement Account (IRA).
Single/Employed Head of Household
If you’re carrying the weight of all cost-of-living expenses on your own, advisors recommend saving a minimum cash reserve of six months but if possible one year of living expenses.
Six months to one year of reserves is necessary if you:
- have a high cost-of-living
- own your own home
- have a job that isn’t very stable (e.g. seasonal worker, artist, independent contractor)
- have dependents you support
- have a chronic medical condition
If your job is tenuous and you are the family’s sole breadwinner, Citibank’s Emergency Fund advises it makes sense to keep the full six months or more of reserves in a regular savings account. It’s also important to keep your cost of living under control.
Citibank also recommends keeping your core living expenses at 50 percent of your pretax income or less. These core living expenses consist of things like mortgage or rent, consumer-debt payments, utilities, and food.
That means the other 50 percent would be going to items such as income taxes, monthly savings, vacations, eating out, and entertainment.
Retirees/Nearing Retirement/Pensioners on a Fixed Income
In the event of a sudden emergency, experts say single or partnered people and retirees (or those approaching retirement) living on a fixed income should save a minimum of one year, but if possible three years of reserve cash for living expenses.
One to Three Years of reserves is necessary if you:
- are retired or are nearing retirement
- have a high-income or specialized job that might require extra time to replace
- are the only provider for more than one dependent
“It’s always prudent for people to have a few months of liquid expenses in a separate fund for emergencies, however, in retirement that changes to at least one year,” said Chris Lean, investment director, Aisa International. “If you can manage to save more than that, even better, and the more secure you’ll feel because the money is always there if you ever need to access it.”
The goal is to tap your special reserve savings only for expenses directly related to an unexpected emergency. Wells Fargo advises setting a specific dollar amount that should be in that reserve account so you will know how much to build up to.
When you draw from the emergency savings, you’ll know how much to contribute to replenish the account.
“And it’s important to remember that no matter what unforeseen life event triggers a withdrawal from your emergency fund, don’t forget to start rebuilding it as soon as possible,” Lean said.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
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