Emergency funds, also known as “emergency funds,” are funds specifically used to deal with unexpected situations such as illness, unemployment, and major repairs. If you live in the United States, this amount of money may not be a small figure. Therefore, developing good saving habits is crucial.
According to a report by Investopedia, a typical American household should have at least $33,000 set aside for emergencies. This figure is based on the average cost of six months of expenses for a household with at least two people.
Caleb Silver, the Managing Editor of Investopedia, stated, “This should be a wake-up call for people.”
“We need to save diligently for unexpected needs,” he said. “If you believe that saving can help you out of a crisis, you must have enough savings to get through tough times.”
According to research by the Investopedia team, the largest expense category in an emergency fund is healthcare. Assuming you become unemployed, the post-employment healthcare costs could become very expensive.
Healthcare costs of $10,754.63: Based on six months of average insurance premiums under single-person COBRA multiplied by the average number of people in a household;
Car expenses of $10,250: If you have two cars but only use one, the average costs for six months;
Housing and utilities expenses of $9,137.17: Average costs for housing and utilities for tenants and homeowners over six months;
Food expenses of $2,968.88: Average grocery costs over six months.
Experts at Investopedia emphasize that this is a conservative estimate. For example, assuming that you do not dine out during emergency situations and only use one car as mentioned above.
Federal data shows that about three-quarters of American households with bank accounts have savings of less than $33,000.
A report by “USA Today” cited Financial Planning Director Kelli Smith from Edelman Financial Engines saying, “To avoid accumulating debts, we need to develop good spending and saving habits. Emergency savings is a good starting point for cultivating these habits.”
According to Bankrate’s “2024 Emergency Savings Report,” 27% of adults reported not having emergency savings.
If you are one of the 27% of Americans without emergency savings, here are some recommendations compiled by “USA Today” from various experts:
Currently, interest rates are higher, and high-yield savings accounts have the highest rates in years.
With the Federal Reserve raising rates significantly to curb inflation, competitive high-yield savings accounts have had interest rates between 4% and 5% over the past two years.
Silver mentioned, “High-yield savings accounts are an ideal choice for emergency savings accounts.”
Money market accounts are another option for high-yield savings. These accounts are offered by banks and credit unions and are federally supported.
Money market accounts may not be as flexible as savings accounts: you may not be able to easily transfer funds in and out. However, experts say that money market accounts should be flexible enough for emergency savings.
During periods of low interest rates, money market accounts struggled, but now with competitive rates reaching 4% to 5%.
Accumulating emergency savings by setting up automatic transfers from your salary is a good option. And the person may not even feel the “loss” of a portion of the money.
Greg McBride, Chief Financial Analyst at Bankrate, stated, “Successful savings come from forming habits, and the best way to establish this habit is to automate it.”
If you automatically save $100 each time, it may take several years to accumulate $33,000 in savings.
Here’s a shortcut: the next time you receive a tax refund, holiday bonus, or any other “windfall,” deposit the entire amount into your emergency savings account.
McBride said, “Whether it’s a raise, bonus, or additional income from a side job, these are good opportunities to save extra funds.”