Building up an Emergency Savings Account
Today we’re diving into savings 🤑 Specifically, emergency savings. It’s never the most fun to think about future emergencies -- but as caregivers, we know how easily they can come up. Many of you have had to leave jobs unexpectedly because of caregiving duties -- and wouldn’t that have been made much easier with emergency savings built up??
But it can be very hard to figure out how much money you should save, and how you can make that happen. There is so much boilerplate information online, and it’s easy to fall into believing one-size-fits-all advice. You can find articles about why everybody must have $10,000 saved, or 12 months of living expenses, or why you shouldn’t save more than $1,000 until all credit card debt is paid off.
But you know what?
None of that generic advice is relevant to you. An article online (even this one!) cannot tell you what’s right for your financial situation, or how much money you will need to save for retirement. Everybody has different circumstances, expenses, and risk tolerances. That means that everybody's savings needs are just as different.
Most of us have been in situations where something came up, and we didn’t have enough cash to cover it, right?! Whether it’s a job loss, an unexpected medical bill, or a car repair -- there’s always something. Emergency savings is one of the most important parts of personal finance -- it’s what ensures you can weather a storm, protect yourself, and keep loved ones safe.
But how much should you be saving to cover life’s unexpected expenses? Remember how I just said that no online article can predict your financial needs?? That’s never more true than with emergency savings!
But here's a list of 5 questions you can ask yourself to help guide your emergency savings target. Starting with 3 months’ living expenses as a baseline, ask yourself the following questions:
- Are you in a single- or double-income household? If you're the only earner, your savings needs will be higher because there's no backup income. If you have a partner who also earns, the likelihood of you both losing jobs at the same time is lower, so you might choose to save less.
- Are you self-employed? If you don’t have a steady paycheck, you might want a higher emergency savings to tide you over during hard times. When Covid hit, most industries saw an immediate downturn. A lot of that has rebounded -- but a lot of business owners saw that having extra in savings was key to making it through the worst months.
- Be honest...how much could (and would) you reduce expenses in an emergency? If most of your costs are fixed (like housing or medical costs) you'll need a higher buffer than somebody with a higher ratio of variable expenses (like travel) that are potentially easier to cut.
- What does your backup support system look like? Do you have a side hustle, a rental property, or family/friends who would help you? Backup support varies widely and is an issue of systemic inequalities. But being honest about what support is available to you is an important factor in how much you might need to save.
- How many people does your income support? If it's just you, you might choose to take a gamble and save less. But if other people rely on you, you might want more saved.
These are just a few of the questions I go through with clients to guide savings targets. But remember, nobody’s savings are built overnight! These questions aren’t here to make you feel discouraged, but rather to help guide you through setting goals.
It’s normal for this to feel very overwhelming. Most of us start with savings at zero, so it can feel like you’ll never hit your target. But with a plan in place, you can hit your goals faster than you’d imagine.
Action: open a savings account if you don’t have one already. Then we can talk about how to get started with growing your savings!