Having proper emergency savings is the fundamental foundation of financial health for anyone of all ages. In fact, emergency savings must be your number one priority when it comes to controlling your money. Whether it’s floods, fires, health events, unemployment, economic downturns, or anything else, emergency savings can help you get through tough places without getting into debt.
What is emergency savings?
Emergency savings are easy to access money and what you set aside for emergency situations and unexpected expenses. It is most common to hold emergency funds on a money market account or another low-risk vehicle.
Unexpected events ranging from medical emergencies to sudden unemployment can quickly unravel the most carefully planned budget. Emergency funds, which act as financial safety nets, provide a buffer to get you exposed to unexpected circumstances.
Life is unpredictable. In fact, the only thing you can know is that things happen that you didn’t expect. Emergency savings allow you to prepare for the unknown
Most people lack sufficient emergency savings
According to the Consumer Financial Protection Bureau (CFPB):
- Nearly a quarter of consumers will not be saved due to an emergency
- 39% have less than a month of cash available to receive a financial shock
- The underprivileged consumers, those who are most hurt in emergencies are least likely to save emergency
- Consumers without emergency savings are most likely to struggle to fulfill their financial obligations
- With emergency savings, people are better positioned to save and invest in homeownership, retirement savings accounts, and other wealth-building financial products.
Without urgent savings, you risk digging deep financial holes
Without emergency savings, financial shocks can set you back, and even a small emergency can have lasting effects if you have to borrow to cover your obligations.
Undertaking debt is like digging yourself into a financial hole. Debt can be a small amount of expenses as a significant expense, meaning it is more difficult than ever to save properly for the future.
You may believe that a stable income and a healthy lifestyle will protect you from financial disasters, but that’s not the case. What happens if you’re in a car accident and you can’t work for a while? Loss of medical expenses, rehabilitation costs, and income can mean that you need to borrow money, accumulate high-profit debt, and violate long-term financial goals.
How much emergency savings do you need?
The amount of emergency savings an individual should have depends on a variety of factors, including income, costs, lifestyle, and personal circumstances. However, here are some general guidelines for emergency savings recommended based on different age ranges:
Early 20s to early 30s: At this stage, we recommend aiming for an emergency fund that covers at least 3-6 months’ worth of essential costs. This includes rent/mortgages, utilities, food, transportation and insurance. Individuals of this age group have low financial obligations and fewer dependents, so they can focus on building a solid foundation for emergency savings.
40s to 50s: By the time an individual reaches his 40s and 50s, he should aim to have an emergency fund that covers six to 12 months’ worth of important expenses. This stage can lead to increased financial liability, including mortgage payments, child education, and medical expenses. Building more substantial emergency funds gives you a greater cushion to navigate these potential financial challenges.
Over the 60s: Having a robust emergency fund becomes even more important as individuals approach retirement or enter the retirement year. Aim for a minimum of 12 months’ worth of important expenses. This is because unexpected medical costs or market slump can have a significant impact on retirees. Having larger emergency funds will help reduce these risks and provide greater financial security during retirement.
Why do you need large emergency funds when you retire?
Large emergency funds are not always necessary when you retire. Especially if your guaranteed income (social security, pensions, pensions, etc.) ensures that you cover essential costs. However, if you rely heavily on withdrawals to fund your lifestyle, having a cash reserve is important.
Covering costs to tap your portfolio during a long-term market slump means selling your assets lost. Dedicated cash cushions allow you to avoid withdrawals when the market is falling, giving your investment time to recover. Think of it as a buffer that protects your long-term planning from short-term volatility.
The exact amount required will vary
It is important to note that these guidelines are general recommendations and personal circumstances may vary. Factors such as employment stability, health status, and individual risk tolerance should also be taken into consideration when deciding on the right amount of emergency savings. Furthermore, as your personal financial situation evolves over time, regular reassessment and adjustments to your emergency savings targets is important to ensure continuous financial health.
Unexpected plans – without getting your retirement off track
The truth is that not everyone needs the same amount of emergency savings when they retire. The right amount depends on your source of income, your spending needs, and how much of your plans depends on the market. Therefore, it is essential to model different scenarios and stress-test your plans.
The Boldin Retirement Planner makes it easy to see how much cash cushion you need based on your actual income, expenses and investment strategy. You can test market slump, healthcare shocks, and big one-off costs.
Retirement confidence is not about avoiding risk, it’s about being prepared.
