Would you be able to pay for a major car repair or medical bill without resorting to credit cards? Everyone needs an emergency fund to cover the cost of unexpected expenses. Imagine suddenly finding yourself without a job. Have you thought about how you’ll pay your bills that aren’t covered by unemployment benefits? If you haven’t prioritized saving for emergencies, you’re not alone. The Pew Charitable Trusts reports that one third of American families have no savings, while nearly half don’t have enough savings to cover a surprise $2,000 expense. Don’t let yourself be one of those who aren’t ready when disaster hits.
What are Liquid Savings?
Liquid savings are defined as assets that can easily be converted to cash when you need it. The Harvard Business School recommends keeping your liquid funds in a few different places. A checking account should hold about one month’s pay to cover monthly living expenses. An interest-bearing savings account can be used to store emergency cash. A retirement account should not be thought of as a source of liquid cash since in most cases you will incur a penalty for withdrawal. You also should not consider investing your liquid savings in stocks. You need your emergency fund to be safe from market risk and easy to access.
Recommended Liquid Savings Balance
The opinion among financial experts varies as to exactly how much money you should have in an emergency fund, but the general consensus is that you should save enough to cover three to nine months of living expenses. In order to determine how much this is for you, you’ll need to first estimate your spending for critical expenses like food, shelter, transportation, healthcare and debt. These are things you would still need to budget for in the event of a major disaster or job loss. Your emergency fund doesn’t need to include money for entertainment, dining out or nonessential shopping.
How to Save More
Many people find it challenging to set aside up to nine months of living expenses for emergencies. Consistency is the key for those who are successful. Even if you start with small contributions, setting money aside on a regular basis will help your liquid saving grow over time. You may want to have your bank automatically move a fixed amount of money from your checking account to a savings account as soon as your paycheck is deposited. You can also boost your emergency fund by saving your tax refund instead of splurging on a vacation or other luxury.
- Thinkstock/Comstock/Getty Images