An emergency fund is a critical tool for financial security, especially in a period where there is uncertainty in the market. Having a cash reserve set aside specifically for unexpected expenses or financial emergencies can be the difference between financial survival and an unclimbable mountain of debt.
What’s an Emergency Fund?
The ideal size of an emergency fund depends on factors like your expenses, lifestyle and debts, but typically the recommendation is to save enough to cover anywhere from three to six months of fixed costs — insurance, groceries, rent/mortgage, etc. This reserve can help you weather a modest healthcare bill or a short bout of unemployment.
Because it takes time to save and build an emergency fund, many people make small, automated monthly contributions to either a savings account or money market account. But according to research from New York Life Insurance, about one-third of adults are contributing less to their emergency funds so that they’re able to cover their everyday expenses as inflation surges.
The average reduction in monthly contributions to those emergency accounts is $243, with millennials making the biggest cut: $289.
Inflation is running at 8.3% year over year, according to the most recent measurement from the U.S. Bureau of Labor Statistics. Although it’s down slightly from March’s peak of 8.5%, it’s still far above the Federal Reserve’s target of 2%.
Dylan Huang of New York Life said, “While its concerning that the increased costs of everyday goods and regular expenses may deflate a necessary financial cushion, this environment means households are making calculated decisions about how to adjust their financial strategy in the way that makes the most sense for them.”
That said, if you or someone you know is struggling to determine how to budget themselves or their families in this difficult time period, our financial advisors are always available to help.
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