Having an emergency fund is an essential part of financial stability. These savings fill in the gaps when you can’t stretch your paycheck to cover all your usual bills and an unexpected expense. And if living through the pandemic has taught you anything, it’s that you never know when an unexpected expense could come your way.
Most financial advisors talk about the emergency fund in plain terms. Everyone must have one, and that you should save as much as six months of living expenses for it to really help you take care of whatever curveballs life tosses your way.
But is that all there is to know about the emergency fund? At a time when things are more expensive than ever and wages aren’t growing alongside inflation, saving can be one of the hardest things you do.
Let’s get real about these emergency savings. Knowing how reality differs from your expectations can help you be better prepared for the future.
Expectation: Your Emergency Fund is Ready for Anything
When you read about the emergency fund, it can seem like a never-ending source of extra cash that can bail you out of every unexpected issue.
Reality: You’ll Run out of Money Before Your Next Expense
The problem is that it takes a lot longer to save money than spend it. Even if you have a plan to repay your emergency fund, it could take you months before you get back to your goal.
What happens if you hit a stretch of bad luck? If your furnace breaks down the same month your toilet overflows, your car tire blows, and your cat needs emergency vet care, you might drain your fund down to zero, leaving you with nothing for the next unfortunate emergency.
If you can’t wait to handle this emergency expense, you can find direct deposit loans online to fill in the gaps. These online loans arrive in your bank account quickly, so you can take care of a household repair without delay.
While direct deposit loans promise fast funds, the online loan experts at MoneyKey advise the exact speed depends on your bank’s deposit policy. As a result, everyone might receive these direct deposit loans at varying speeds.
Expectation: You’ll Save 6 Months of Living Expenses
While there are no hard rules about savings, most advisors agree you should have six months of living expenses squirreled away. This generous amount is resilient against most small emergencies that crop up from time to time, like unexpected household repairs, medical expenses, and car trouble.
It can even provide relief from life’s bigger emergencies. If you get laid off or take a leave of absence to look after a sick family member, you’ll be able to cover six months of your living expenses before you need to rethink your employment situation.
Reality: The Median Savings Account Balance is $5,300
What you should save is a lot different from what people wind up socking away. In reality, the median savings account balance is just $5,300, which stretches to about $883 each month for six months.
This won’t help much if you can’t work for an extended period. But don’t be discouraged — almost any savings are better than nothing. And $5,300 is still a significant amount of money that can help with several smaller bills.
While an emergency fund is important, it’s not as invincible. Understanding its shortcomings can help you plan around them.