September 23, 2022

Now is the Time to Replenish Your Emergency Fund

Dwight Cass
Forbes, The New York Times & Wall Street Journal Commentator

Many families had to dip into the savings that they set aside for emergencies during the Covid pandemic. Despite the stimulus checks, extended unemployment benefits, and eviction moratoriums, many people faced unexpected Covid-related medical bills and other financial challenges.

In fact, almost 40 percent of people surveyed by YouGov for Forbes, all of whom had emergency savings prior to March 2020, had to spend some of these funds. Among those, nearly three-quarters spent half or more of their rainy-day savings.

Now that the economy is recovering, it is time to replenish those emergency funds.

Having an adequate emergency fund heads off a lot of trouble. Late last year, 24 percent of U.S. households said they were having difficulty paying their bills, according the Federal Reserve’s 2021 Survey of Household Economics and Decisionmaking. One in ten said they would be unable to pay an unexpected $400 bill – say, for a car repair or medical issue – out of their savings. 

These individuals face unpleasant choices, as the graph below shows, including piling on expensive credit card debt or borrowing from a friend or family member.

How American Families Who Do Not Have Emergency Funds Pay for Unexpected Expenses

Chart, bar chartDescription automatically generated
Source: Federal Reserve Report on the Economic Well-Being of U.S. Households in 2021 - May 2022

This is the reason financial advisors urge families to sock away money in an emergency fund. The amount you should save depends on your fixed monthly expenses. Add up your rent or mortgage payment, car payment or commutation cost, and food, childcare and utility expenses for an average month. Then seek to save enough money to cover that total for at least three months, and ideally six months.

If your monthly fixed expenses add up to $2,000, you should seek to set aside at least $6,000. 

According to An essential guide to building an emergency fund from the U.S. Consumer Financial Protection Bureau (CFPB), there are several key elements to rebuilding your emergency fund.

  1. Create a savings habit. 

It is easier to save money if you make an automatic habit of it. Set a specific goal for your emergency fund, to keep you motivated. The CFPB has a savings planning tool on its website that you can use to calculate how long it will take to reach your goal, based on how much you can save each month. 

  1. Manage your cash flow.

If all your bills and rent come due at the end of the month, that is a bad time to expect that you will have leftover money to put in your emergency fund. Rather, look at when during the month your income exceeds your expenses, and plan to make your savings contribution then.

  1. Take advantage of one-time opportunities. 

You can get a big jump on your savings if you have “windfalls” from time to time, like tax refund checks, or cash you receive as a gift for your birthday. Of course, you will want to use part of that money for other goals and to enjoy yourself, but if you squirrel some of it away, you can meet your emergency fund goal faster.

  1. Make your savings automatic.

You can instruct the account where you deposit your paycheck to transfer a given amount into your emergency fund savings account each month.

It is also useful to take a close look at your budget. You might find you are paying for services you do not need. For example, you might have a streaming service subscription like Netflix or Hulu that you do not watch, or an online newspaper subscription you do not get around to reading.

Cancel them and direct the savings into your emergency fund. If the economy does encounter further challenges in 2023, you will be glad you did.

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