Should you increase your emergency fund if inflation rises?
Inflation has been in the news a lot in recent years due to its rampant nature. The reality now is that moderate inflation is a consistent part of the economic cycle. However, the inflation we have experienced recently has been enough to significantly increase the cost of living.
Annual inflation in February was measured at 3.2% per consumer price index (an index that tracks changes in the cost of common consumer goods and services) for the month. This is an improvement over the inflation levels seen in 2022, but is still high.
If you have money in your emergency fund, it may be a good idea to add to it by reevaluating your savings to account for recent inflation. Here’s why:
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It is important to make sure you are covered.
Typically, your emergency fund should contain enough money to cover at least three months of essential expenses. If you decide to save more than that for better protection, great.
The reason it’s important to add to your savings account during inflationary periods is because the cost of essential bills can rise. You may need to top up your savings to continue covering three months’ worth of bills.
For example, let’s say this time last year, your monthly essential bills amounted to $3,000. What happens if you’re now spending more than $3,200 on essentials because inflation is causing the cost of groceries, rent, utilities, etc. to rise?
If you have $9,000 in an emergency fund, you’re still in good shape. But do you have enough money in the bank to cover three months’ worth of essential bills? no.
Now, based on the latest increase, you’d need $9,600 to cover three months’ worth of bills. So, in this example, it would be a good idea to add $600 to your emergency fund.
This is not necessarily a stressful or task that needs to be done immediately. But over time, it is wise to do so.
Keep track of your emergency fund
It’s a good idea to evaluate your emergency savings every six months to ensure you have sufficient financial protection, even during periods when inflation isn’t rampant. Even if inflation isn’t an issue, rents may go up particularly well at some point because landlords charge large increases. Or, your homeowners insurance premiums may increase due to increases from your insurance company.
If you make the effort to build and maintain an emergency fund, it will give you the peace of mind you deserve. So keep checking to make sure you’re actually covered the way you want. And if you realize that your funds are a little tight, you can take steps to calmly but efficiently add money to your savings so you don’t panic or panic if a layoff or large unplanned bill arises.
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