Emergencies happen — but relatively few Americans have the savings they need to handle an unexpected expense. Only 41% have enough money put away to handle a $1,000 emergency, according to data from Bankrate, and 28% have no emergency savings at all.
Luckily, saving up for an emergency fund may not be as big of an undertaking as you think.
The average household's annual expenditures total $61,224, according to the Bureau of Labor Statistics. Using that figure as a benchmark, an average household's 3-6 month emergency fund would need to have a balance between $15,500 and $31,000.
That can be a daunting goal, so it helps to aim for smaller milestones along the way. Having even $1,000 saved could be a huge help, and yet only 41% of Americans have $1,000 put away for an emergency.
Another possible aim: $3,500, which is in line with how much a typical emergency actually costs, according to the Bankrate survey.
So, if you were to give yourself one year to save up $1,000 or $3,500, how much would you need to save from each paycheck? Assuming you receive 26 paychecks over the course of the year, are earning the average household income of $62,000, and are starting from scratch, you'd need to save just over $38 each paycheck to reach a balance of $1,000 within a year. To reach $3,500, you'd need to set aside just almost $135.
Video by Jason Armesto
Your budget will help you figure out how much you can afford to save every month, while your emergency fund will act as a safety net. It can help you cope with increased expenses thanks to a surprise medical bill or flat tire without taking on debt. It can even help you get by if you suddenly lose your job.
"Ever since the financial crisis, people recognize how important emergency savings is, and they know they're behind," Greg McBride, chief financial analyst at Bankrate, recently told Grow. "Among millennials, for example, we see that it's one of their top financial goals, and I think that is an indicator of progress that people recognize how important it is, more so than in the past."
Financial advisors generally recommend that your emergency fund eventually contains enough to cover 3 to 6 months' worth of your household expenses. The ideal, in other words, is that you'll have enough savings to get by for several months with no income whatsoever.
The typical American has at least some money in savings, so you may be closer to your goal of creating an emergency fund than you think.
To make the most of yours, consider keeping your emergency fund in a high-yield savings account. As your savings grow, the interest will compound, acting as a multiplier to grow your money faster. You can use Grow's compound interest calculator to get a sense of what kind of growth you can expect — just be aware that you'll likely need to save for a while before you see any substantial consequences of compounding.
If you don't need to tap your emergency fund and can consistently add to it, you could see big benefits over time.
"If you have very little that you're able to save, the more you can lean in and let the interest help you — you'll see that growth," says Jacqui Kearns, chief brand officer at New Jersey-based Affinity Federal Credit Union. "You may not see the benefit [of compounding] the first year, but five or 10 years down the line," you could be surprised at how much interest your savings have accrued.
You can also set up automatic transfers to make sure that you're regularly contributing to your savings. By scheduling those withdrawals to happen on payday — essentially, paying yourself first — you'll get used to getting by without that money in your budget. Picking up an additional income stream, like a side hustle, can also help you pad your savings.
Finally, you can always use one-off windfalls, like a bonus at work or your tax refund, to help you get ahead in your savings timeline, too. Last year, the average refund was almost $2,900, which would put you more than 80% of the way to that $3,500 goal.
Before you know it, you'll be ready for whatever financial surprises life throws your way.
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