Most Americans don’t have an emergency fund. In fact, only one in three households has enough money set aside to cover six months of expenses if they lose their job.
High inflation doesn’t help matters, either. If you’re looking to protect your finances against debt, inflation, or another financial crisis, then you must understand your options. So let’s discuss what is an emergency fund and how to ensure you always have enough money, no matter what the economy looks like.
What is an emergency fund?
An emergency fund is a savings account set aside specifically for unexpected expenses. These may include:
- Debt payments: If you have debt, an emergency fund will help you pay off that debt more quickly.
- Medical bills: Many people have medical bills that they can’t pay off in time. An emergency fund will help you cover those bills without resorting to expensive credit options or filing for bankruptcy.
- Rent or mortgage payments: If your rent or mortgage unexpectedly goes up, having an emergency fund can help cover the increase.
How much should I save?
There is no one answer to this question since it depends on your income, expenses, and other financial factors. If you’re starting an emergency fund for the first time, most experts recommend starting with a goal of $1,000. Once you hit your first $1,000 saved, a good rule of thumb is to aim for at least three-to-six months worth of living expenses.
How to build an emergency fund even when inflation rates are high
While saving in high-inflation environments might be more difficult, there are still ways to build an emergency fund.
The good news is that interest rates may be in your favor during high inflation. The Federal Reserve will often raise interest rates to curb inflation (the higher the interest rate, the fewer people are willing to borrow money which frees up cashflows). While interest rates will rise on credit cards and other debts, they’ll also increase on savings accounts, too. So the sooner you begin your emergency fund, the more you’ll be able to take advantage of compound interest.
The easiest way to start is by simply putting $1 of every deposit from your checking into a dedicated savings account. Doing this will get you into the habit of putting money away and slowly adjusting your spending habits.
From there, you can increase the amount you save each month by automatically having a portion of your paycheck deposited into your emergency fund, saving you the hassle of doing it manually. Remember, though, that your emergency fund should be money you don’t need until an emergency, so don’t try to put too much money into it at once, or you might need to make a few withdrawals to make ends meet.
The bottom line
Having an emergency fund is essential for every household. Building a solid emergency fund takes time and effort, but it’s definitely worth it in high-inflation environments. By creating and maintaining an emergency fund, you can protect yourself from financial emergencies and keep your finances stable.