If you want to be financially stable, you need an emergency fund. An emergency fund is money you keep in a high-yield savings account where it is accessible when you need it. The money is supposed to be used to cover your bills in case of a loss of income or to pay for other essential and unavoidable expenses that catch you by surprise.
Many people have no emergency funds at all, so if you have any emergency savings, then you’re on the right track and hopefully will have better long-term financial prospects because of it.
But just because you’ve got some cash in a savings account for emergencies doesn’t necessarily mean you’re always in great financial shape to deal with unpleasant surprises. In fact, you should watch for these three potential signs that your emergency fund is just too small.
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1. You couldn’t cope with a loss of income that lasts several months
A health issue or a job loss could easily take several months to resolve — potentially leaving you with less income or even no income as you work to get back on track. You need to make sure you’re prepared for an extended income cut without risking paying bills late and ending up in debt.
That’s why it’s so important to have an emergency fund with enough money in it to cover essential costs through at least three months of hardship. And, ideally, most emergency funds will be even bigger and will provide enough money to cover six to eight months of expenditures.
This may seem like a lot of money. But the reality is that it could easily take months before you start getting a paycheck again if you’re left unemployed, once you factor in a job search and the fact most people aren’t paid immediately the first day they start work. If you can’t cover at least a few months of costs with your savings, you could be in real trouble.
2. You’re still constantly worried about money
Emergency funds should provide you with peace of mind. They should alleviate your financial worries because you’ll be well aware that the money is there for you when you need it.
Unfortunately, this only works if your emergency fund is large enough that you genuinely don’t need to worry about covering the bills for a few months if something bad happens.
If you still find yourself lying awake wondering how you’d pay your expenses if you lost your job or how you’d cover medical costs if you or your spouse got sick, then you need to bulk up your emergency account balance.
3. You frequently end up in debt because of unexpected financial costs
One of the key benefits of emergency funds is that they protect you from ending up in debt. The idea is that when a surprise expense creeps up or an unexpected income cut happens, you won’t need to turn to credit cards to cover the costs.
But if you repeatedly end up with emergencies that cost more than the amount in your emergency fund, then it’s clear you don’t have enough saved and you need to prioritize bulking up your account quickly.
Ultimately, for most people, having three to six months of living expenses will be plenty of money to cover most things that go wrong. Aiming for this goal is a good place to start. But you need to be on the lookout for these signs that the amount you have simply isn’t enough for you. If that’s the case, you’ll need to think carefully about your lifestyle and the level of financial risk you’re willing to take on so you can decide how much is best for you to personally save for a rainy day.
View more information: https://www.fool.com/the-ascent/personal-finance/articles/3-signs-your-emergency-fund-is-too-small/