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Question: Some of my friends have been laid off, prompting my husband and me to take saving money more seriously. How much should we save in the off chance one or both of us lose our jobs?
Answer: Preparing for worst-case scenarios is a smart move as part of financial planning. The more you’re able to save, the less you’ll have to incur debt to pay for living expenses if you or your husband face a job loss or another financial hardship arises.
So, saving any money is a good start. The key is to determine how much you really need in an emergency fund. I’ll show you how to determine this savings goal as well as strategies to reach it quickly.
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How much do I really need in an emergency fund?
It’s going to depend on several factors, such as:
- How much do you need for essential expenses?
- Do both spouses work full-time?
- Are you self-employed?
- Does one spouse make significantly more than the other?
- The job market/forecast/location of the occupation you’re currently in
To begin, review the last six months of bank and credit card statements to calculate your average monthly essential expenses. Using several months of data can help smooth out seasonal spikes in spending and provide a more realistic estimate of what you’ll need if your income is disrupted.
For items like streaming, dining out and entertainment, I would only factor in minimal amounts since you’ll want to maximize every cent you earn to account for a job loss.
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Once you’ve calculated your average monthly essential expenses, I generally recommend saving enough to cover at least six months of expenses. If both spouses work full-time and earn similar incomes, three months may be sufficient.
Meanwhile, if you’re self-employed or in a highly specialized field, aim for nine months to a year of savings. The goal here is to create enough of a cushion where your changed circumstances don’t result in you incurring debt.
With this target in mind, I’ll show you some strategies that will help you get there quickly.
Conquer your savings goal quickly. Here’s how
The first is where you choose to store your cash. I like online banks because they offer higher returns with minimal fees. The best high-yield savings accounts can earn you up to 4.20% APY, keeping you ahead of rising inflation while helping you reach your savings goals quicker.
I also like them because it’s easy to add money, and you can keep that money separate from your checking account. This can prevent impulse purchases while also giving you easy access to keep building your savings.
Use this tool, powered by Bankrate, to find and compare options quickly:
How much can you earn with a high-yield savings account? Using one of the top savings account offers we’ve found, Newtek Bank, a saver who starts with $5,000 and contributes $250 each month could grow their balance to about $8,273 after one year at 4.20% APY. That’s roughly $273 in interest earnings, in addition to the $8,000 deposited over the course of the year.
Now, to reach these goals quickly, you’ll first want to take stock of your finances. I like budgeting apps because they let me view multiple bank accounts in one hub and identify spending patterns I can adjust. Doing this first helps you maximize savings.
Some popular options include You Need A Budget (YNAB), which focuses on assigning every dollar a job, Monarch Money, which offers customizable budgeting and net-worth tracking tools, and Quicken Simplifi, which helps users monitor spending, savings and financial goals in one place. The best app is the one you’ll use consistently, so consider testing a few options to see which fits your budgeting style.
Next, set up automatic transfers. This serves several purposes: First, you’ll have steady contributions going into your account, so your balance builds. This gives you momentum and can incentivize you to save more if you receive tax refunds, work bonuses, or other unexpected income. Second, it takes one less thing off your plate, and you treat the transfer as a payment in your budget.
Can I save too much?
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Yes, you can save too much. While it’s important to build a healthy savings safety net in case the unexpected happens, once you reach your goal, you’ll want to tackle other things in your financial checklist.
If you’re behind on retirement, redirect the funds normally set aside for savings into your investments. Keep in mind that, even amid market volatility, investments have historically delivered higher long-term returns than savings accounts, and the longer you stay invested, the more you can benefit from compounding.
Alternatively, if you’re working toward other savings goals, such as buying a house in the next few years, use the same strategies. Open another high-yield savings account separate from your fully funded emergency account, and build your savings this way.
Ultimately, preparing for worst-case scenarios can give you peace of mind if they happen. You’ll also develop sound savings habits that you can apply to other areas of your financial life. Not only can this help you reach your goals, but it also saves you money because you won’t have to rely on credit cards to cover essentials until you’re back on your feet.
If you’d like personalized guidance, use the tool below, powered by Bankrate, to connect with a financial professional who can help you achieve your goals:
