How Much Do You Need For An Emergency Fund?
When we talk about saving for an emergency fund we talk about losing a job—this is the ultimate emergency. The loss of a job means the loss of so much more than a paycheck. It is the loss of healthcare, the loss of retirement benefits and the loss of morale. You need an emergency fund at the ready to deal with these losses. How much do you need to save before you can say that you’ve accomplished the goal of a complete emergency fund? The answer is more than you think.
A Look At The Number
A 2015 survey conducted by Princeton Survey Research Associates determined that only 37% of Americans are equipped to pay for an unexpected expense of approximately $1,000 with savings. The simple fact is this: most of us don’t have a plan. The problem is two-fold. First, you must deal with the unforeseen expense itself. Second, you must handle the long-term repercussions. This could include paying a high interest rate on a much-needed short-term loan. Another example: meeting the costs associated with taking out a home equity loan. One problem begets another problem and the chain grows. This survey is limited to the hypothetical of a $1,000 cost. However, losing a job will mean far greater costs than just $1,000.
What is the dollars-and-cents cost of losing a job? Consider a review of recent figures from the US Bureau Of Labor Statistics. The assessment reflects, “Average expenditures per consumer unit in 2014 were $53,495, a 4.7-percent increase from 2013 levels.” Remember, this is “per consumer”—a family will represent a multiple of this number. This number is high.
Landing a job takes time. For some it will be five months, for others it will be eight. With enough saved for one year, you can rest assured you’ll be covered. Ample savings are important because they will allow you to focus, without distraction, on the job search process. Make your goal to save one year’s worth of expenses, which for one person can be estimated at approximately $53,000.
The Saving Grace
You won’t have to go it alone. Remember, if your emergency savings goal is $53,000 you can ease the burden of generating this amount alone with unemployment compensation.Don’t forget to factor this into your calculations. The estimated amount of unemployment compensation varies by region, but you can use a weekly benefit amount of $288 in your planning. This number represents the average of the ten states that pay the highest unemployment compensation and the ten states that pay the lowest rate. $288 for an estimated 26-week duration equals $7,488, bringing the total goal down to $45,512. Consider making automatic, regular payments into a savings account reserved only for this purpose.
Keep It Liquid
Normally it’s wise to keep your savings working for you in the equities market at a 7% annual return. However, in this case, keep the funds liquid and shielded from volatility in a money market account. Your emergency funds need to be at the ready all the time.
Just as we have unexpected expenses, we also from time-to-time, have unexpected gains (e.g. tax refund, lower fuel bill, etc.). These present excellent opportunities to boost your emergency reserve. Start now.