Emergency Funds in 2021

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If there’s one thing people are even more excited to talk about than money, it’s savings right? Okay, okay, so we know thinking about savings may not be at the top of everybody’s Most Fun Activities list but we hope you can spare a few minutes to do it today anyways.

Can money buy happiness?

Almost everything we do requires money. It can be tempting to endlessly chase a higher salary, another source of income, to get more money to save for retirement or enjoy now with our family. It’s true that happiness does increase with money – but only to a certain point. This 2018 study found that the ideal income for overall satisfaction with life in North America was $105,000. Life satisfaction stops increasing when you earn more than $105,000, and it can even decrease. Chasing more and more money to increase your happiness may be a fruitless endeavor.

While you may not be able to buy happiness, money is needed for most things in our society. It is important that you’re able to meet your own and your family’s needs.

That’s where an emergency fund comes in.

What is an emergency fund?

An emergency fund is essentially money you’ve set aside so you’re ready for life’s curveballs. It’s like a safety net between you and the world

The Consumer Financial Protection Bureau defines an emergency fund as “a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, home repairs, medical bills, or a loss of income.”

Unexpected financial costs can turn into debt and have a lasting impact if you’re not ready for them. If you don’t have money set aside for these unpleasant surprises, they can become far more stressful than they need to be. A broken heating system is never fun but it doesn’t need to feel like a crisis if you already have the means set aside to pay for it.

It’s important to remember that an emergency fund is for emergencies. Your favorite new TV going on sale is not an emergency; only things that are true necessities are an appropriate use of emergency funds.

The lower the stability, the higher the fund

If your income and expenses are extremely stable, then you don’t need as high of an emergency fund. There may not have been a lot of stability in the military in terms of frequent moves, etc. but while you were in the military you did have the stability of a very reliable paycheck. Odds are your branch of the military wasn’t going to suddenly go out of business and not be able to pay you one week. You’re probably used to a good deal of financial stability.

In the civilian world, things are much less stable. That’s why we used to recommend a 6-month emergency fund – an emergency fund with enough money to cover your basic expenses for 6 months, should you ever lose your income.

However, with the effects of the global pandemic we now recommend a 9-month emergency fund. It’s unfortunately more likely now than it used to be that you may unexpectedly lose your income. You also may have unexpected medical or other expenses.

Additionally, due to the number of people who have lost their jobs it is now harder to get hired somewhere else if you do unexpectedly lose your source of income. It may take you longer to get plugged into a new source of income than it used to. This pandemic has taught us to be prepared for the unexpected. A 9-month emergency fund is one way to care for yourself and your family in the future by saving now.

Not sure how to save for an emergency fund? Have other financial questions? Register for ADU LIVE, our 21-day sprint course to get hands-on help from experts, answers to your specific questions, and training on how to harness your finances to create your bigger future!

bethany@americandreamu.org

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