A recent study revealed that over 20% of Americans lack adequate emergency savings to manage unforeseen financial challenges like unemployment, home or vehicle repairs, and medical costs. Almost 40% reported being unable to handle an unplanned expense exceeding $400. Financial advisors often recommend saving at least three to six months’ worth of living expenses as a safety net.
Starting this process can seem daunting, but a finance professional and popular author has detailed a plan for creating a three-month emergency fund. The initial step is understanding your monthly expenditures. Calculate your costs for rent or mortgage, groceries, utilities, and mandatory insurance payments like health, renters, and auto insurance.
No estimates here. Multiply your total monthly expenses by three to establish your target savings amount. Then, divide that total by 12.
For instance, if your three-month living expenses amount to $7,500, you would need to save $625 each month to reach your emergency fund goal within a year.
Creating an emergency fund
If saving that amount in a month isn’t feasible, divide by 18 to find out how much to set aside to achieve your goal in a year and a half.
The next step involves opening a savings account at a federally insured bank or credit union. Ensure you automate deposits from your checking account into this new savings account. The transfer should incur no fees, and there should be no charges for maintaining a minimum balance.
The final step is to review your savings account monthly and acknowledge the progress you’ve made. With every passing month, as your funds increase, you are building financial stability and reducing stress in your life.
By following these guidelines and remaining consistent, you can successfully establish a three-month emergency fund. This financial buffer will equip you to handle unexpected costs and grant you peace of mind during difficult periods. The crucial element is to prioritize saving and remain committed to your strategy.
