By Jim Shellenberger, CFA, CFP®
When you encounter an emergency, it often goes hand in hand with an unexpected cost. Whether it’s a car repair, a hospital visit, or a leak in the roof, having emergency savings can act as a safeguard against those surprise expenses. We’ll explore the essentials of creating an emergency savings and how to maximize its potential.
How Much Do Emergencies Cost?
If you’re familiar with the concept of an emergency savings account, you’ve probably heard of the average emergency costing around $400. While this figure has been used in statistics by the Federal Reserve, there’s new data from LendingClub and PYMNTS.com that suggests the average emergency expense has risen to about $1,400. (1) This study also found that consumers who earned higher incomes were likely to have more expensive emergencies.
Average Cost of Emergency by Income Level (2)
|Average Emergency Expense
|Less than $50k
|$50k to $100k
|$100k to $150k
|$150k to $200k
|More than $200k
This new data brings into question how we generally plan for emergencies. Clearly, it shouldn’t be based on the previous guidance of saving at least $400. So when you’re saving for a rainy day, should you base your target savings amount on your income level?
How Much Should You Save?
The amount you set aside in an emergency fund depends on your lifestyle and the unique makeup of your finances. To find the amount you should be saving, we recommend checking your financial records to get a personalized view of how much you should consider saving in an emergency fund. Review the last few emergency expenses you’ve had to get an idea of how much you should save. This includes:
- Unexpected medical expenses
- Home repairs
- Replacing broken electronics
- Car repairs
Then consider how often these events occur for you. According to the previously mentioned report, 46% of consumers experienced at least one unexpected event within the last 90 days. (3)
So far, we’ve discussed saving for one-off emergencies, but we should plan for long-term emergencies as well. This includes events such as the loss of a job or a reduction in income.
A general rule of thumb is to save 3 to 6 months’ worth of your expenses in an emergency fund.
If you and your spouse have similar and stable income, you may be able to pass with the lower end of the threshold. If one spouse makes significantly more than the other or if any of you have unpredictable income, you may want to be on the higher end of the threshold. Certain costs may increase or decrease the target amount you should have in savings. Ultimately, this amount will be personal to your financial situation.
Why Should You Have Emergency Savings?
Having an emergency fund in place helps you avoid several concerns beyond paying for an unplanned event.
Many people make the mistake of using money they’ve earmarked for other goals as part of their emergency planning. However, the lack of a separate emergency fund can delay your progress toward those personal goals. With a dedicated emergency fund, you can keep pace toward those goals and simultaneously prepare for the unexpected.
A well-managed emergency fund can also help you avoid accumulating debt. People without an ample emergency fund often rely on forms of credit to cover the cost. In some cases, it involves high-interest debt such as a credit card or payday loan, which could cost you much more than the initial emergency.
Establishing a dedicated fund for emergencies helps remove the lingering “what-if” of how you’ll handle an unforeseen situation. Preparing for the unexpected helps relieve concern about how you would cover potential costs.
Earn Interest on Your Money
Even if you’re saving money for emergencies, it can be wise to maximize those funds by using high-yield options to store your money. There are high-yield savings accounts where you can earn interest on the balances you hold in the account.
We suggest finding a high-yield savings account to use. We can offer access to a high-yield savings account called Flourish, which carries a 4.65% – 4.25% APY (as of 6/16/2023). (4) Using this option could yield a substantial amount of interest. For example, if you had $15,000 in emergency savings within a high-yield savings account at 4.65% APY, you could earn $697.50 by holding that balance for one year. Compared to a typical checking account at 0.01% APY, you’d only earn $1.50.
You might also consider Treasury bills or certificates of deposit (CDs) which are yielding decent rates currently. At the time of this article, it’s reasonable to find a CD above 4.5% APY. You should keep in mind that CDs and Treasury bills offer less liquidity than a high-yield savings account because they often have penalties for withdrawing early.
Plan How You’ll Handle the Unexpected
Don’t wait until disaster strikes to find out how prepared you are for a financial emergency. At Elevate Wealth Management, we’ll assess your current emergency fund and help you develop a personalized plan that guides you through the financial aspect of life’s unforeseen events. In the process, we’ll help keep your money working efficiently until you need it.
If you’re ready to elevate your finances, get started by booking your discovery call by reaching out to us at email@example.com or 307.673.5675.
Jim Shellenberger, CFA, CFP® is a financial advisor at Elevate Wealth Management, an independent, fee-only wealth management firm serving young professionals, pre-retirees, and retirees in Sheridan, Wyoming, and surrounding areas. With the mission of serving and educating, Jim is dedicated to providing comprehensive, top-notch services that not only help his clients reach their goals, but also empower them to make the best financial decisions for their lives and walk toward their future with confidence. Jim is known for going the extra mile, not only offering valuable knowledge in investment management as a former investment analyst, but building long-lasting relationships so he can give honest, customized advice and strategies that make an impact on their lives.
Jim has a bachelor’s degree in business administration with a minor in finance from the University of Wyoming. He is proud to be a Wyoming native and loves exploring the outdoors with his family—hiking, fishing, hunting, and backpacking. Faith is an integral part of Jim’s life, and he always looks forward to attending church on Sundays, Bible study on Fridays, and being part of his church community. He’s also an avid sports fan! Fun fact: Jim owns shares in the Green Bay Packers. To learn more about Jim, connect with him on LinkedIn.
The views expressed represent the opinion of Frontier Asset Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Frontier Asset Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. The use of such sources does not constitute an endorsement. Frontier does not have an affiliation with any author, company or security noted within. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the Frontier Asset Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. Past performance is not indicative of future results.
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(1) LendingClub and PYMNTS.com Study: https://ir.lendingclub.com/news/news-details/2022/The-400-Emergency-Expense-is-Dead-New-Data-Shows-the-Reality-is-1400/default.aspx
(2) Average Cost of Emergency by Income Level: https://mma.prnewswire.com/media/1885511/lending_club_2_Infographic.html
(4) Flourish High Yield Savings: https://www.flourish.com/clients/cash