If you built up your emergency fund years ago, it may need a serious overhaul. Here’s why

We all know that life has a way of dropping unexpected expenses into people’s laps. You might start your car in the morning and find that it won’t start. Or, you could wake up in the middle of winter to a cold house and be charged $2,000 to fix your heating system.

You also never know when you might fall victim to layoffs. Such a situation can have a serious impact on your finances.

For this reason, it’s important to always have money in a savings account. Your emergency fund should ideally have enough money to cover at least three months of essential bills.

Perhaps you calculated how much you needed to save for an emergency years ago and completed it shortly thereafter. If so, you’ve probably benefited from the peace of mind that comes from knowing your savings are plentiful. But if it’s been a few years since you built an emergency fund, it may be time to increase your savings.

Does your emergency fund account for inflation?

The reason you need to have enough cash in your emergency fund to cover at least three months of essential bills is because it can take such a long time to find work after losing your job. With adequate emergency savings, you should be able to pay your bills without immediately relying on credit card debt.

But inflation has soared in recent years. And despite temperatures dropping slightly over the past 12 months, the cost of living rose 3.5% on an annualized basis in March, as measured by the Consumer Price Index. Because of this, if you set up an emergency fund years ago, you may not actually have enough money to cover three months’ worth of bills.

Let’s say you finished your emergency fund two years ago and your rent at the time was $1,650 a month. If it’s $1,850 a month now, your numbers are wrong.

Likewise, you might have been spending $400 a month on groceries. If you’re currently spending $450, you’re running out of money in that category.

That’s why it’s a good idea to go through your essential bills line by line and add them up to see how much you need to save to cover them for at least three months. Then compare that total to the amount in your emergency fund. If you’re not where you need to be, you’ll learn how to convert more cash into savings.

There may not be such a big lack.

At this point, you may have done a great job building up your emergency fund, but now you’re ready to cry or scream at the thought that it’s not enough. But before you go into panic mode, remember one thing.

Banks have been paying quite generously following the Fed’s 2022 and 2023 rate hikes. So, your emergency fund may still be a little tight, but maybe not. that short Considering the interest income you have accumulated.

Ultimately, you’ll need to build up an emergency fund to help you get through periods of unemployment. If your bills have increased since you completed your emergency fund, take a look at it and try to increase your cash reserves in case a situation arises where you actually need to tap into it.

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