When you're focusing on your day-to-day finances, it's all too easy to let your savings goals to take a backseat. However, a tough economy is exactly when building up your savings should be a priority—specifically, growing your emergency fund. Without a rainy-day fund, a large unplanned bill or payment could turn into long-term debt (like on a credit card) that will have a lasting effect on your budget.
I spoke with WalletHub analyst Cassandra Happe about why an emergency fund is so important in uncertain times, and how and why your savings goals should differ this year. Here’s what to know about saving for the bad times when it looks like they may be just around the corner.
Why an emergency fund is more important than ever right now
First, a recap on what exactly constitutes an “emergency fund,” as opposed to other savings vehicles: Your emergency fund is the cash reserve set aside for unplanned expenses or financial hardship, like job loss, medical emergencies, or unexpected but urgent car or house repairs.
Happe explains that "tailoring your emergency fund to your specific situation is crucial. You should factor in your monthly expenses, job stability, and your lifestyle choices." While the traditional advice recommends saving three to six months’ worth of expenses, that may not be suitable for everyone. This advice can be a good starting point, but Happe notes you "should also consider factors such as job market volatility, unexpected expenses, and potential economic downturns." Especially in the current economic landscape we are navigating in 2024, flexibility and adaptation are key.
How much money to target in your emergency fund in 2024
The typical rule of thumb is to aim for six months’ worth of living expenses in your emergency fund. When you’re figuring out that number, factor in expenses like housing, food, utilities, insurance, transportation, and debt payments. Non-essential expenses like vacations, entertainment, or dining out don’t belong in your “emergency” calculations.
However, the ideal amount of savings in your emergency fund should change in response to the state of the economy. So when you’re living in, say, an inflation-ridden hellscape, Happe says you should actually try to save even more than the typical six months: "It might be wise to save beyond the standard recommendation by aiming for 12 to 18 months’ take-home income for added peace of mind." While achieving this goal might require more aggressive savings strategies or diversifying your financial safety net beyond traditional methods, it's not impossible.
How to start saving when the economy is bad
Setting aside savings might not feel like a priority when times are tough. If even the classic six months worth of expenses is too unrealistic a goal for your current financial situation, another guideline for what counts as a “starter” emergency fund is around one month of rent plus your insurance deductible.
Happe says "it's important to begin by establishing achievable savings targets and automating your contributions." Remember, consistently saving even small amounts can add up over time. Another reminder from Happe is to monitor your progress regularly and "celebrate milestones as a way of staying motivated." Starting to save, even with a small amount, is crucial.
Another place to start is by rerouting some of your expenses. If you haven’t already, make a list of all the things you spend money on, and consider which non-essential expenses could go to your emergency fund instead.
At the end of the day, “cutting back” on your spending might not be as draconian as it seems. (In other words, you can probably still buy the occasional morning coffee.) To get started, check out our tips to quit spending unconsciously.