Avoid These 3 Emergency Fund Mistakes in 2024
At first glance, it doesn’t sound like there are a lot of mistakes you can make when creating an emergency fund. Isn’t an emergency fund supposed to entail saving at least three to six months’ worth of living expenses?
Experts: Make These 7 Money Resolutions If You Want To Become Rich on an Average Salary
Learn More: How To Get $340 a Year in Cash Back – for Things You Already Buy
Conventional wisdom says yes but look a little closer and you might find you’re making some fairly common mistakes building this savings.
If you’re establishing an emergency fund in 2024, you’ll want to make sure you’re doing it the right way the first time. Let’s review three common mistakes to avoid making with your emergency fund.
Saving Only Three to Six Months’ Worth of Expenses
Does the average American have at least three to six months’ worth of savings in their emergency fund in 2024? Unfortunately, the answer is no.
GOBankingRates surveyed 1,039 Americans in November 2023 and discovered only 14% of overall Americans would be able to cover two to three months of expenses with their emergency fund. And only 10% of overall Americans have enough money to cover half a year’s worth of expenses.
Several experts GOBankingRates spoke to about emergency funds mentioned avoiding the mistake of not saving enough money. Even more said that the three-to-six-month benchmark isn’t enough to save for emergencies anymore.
Hazel Secco, CFP and founder of Align Financial Solutions, said the events of the COVID-19 pandemic highlighted the inadequacy of this standard for many individuals, especially business owners.
“While the three to six months’ guideline is commonly emphasized, its applicability should be evaluated based on individual needs, lifestyle, career stage and overall financial situation,” said Secco.
Katherine Edwards, financial planner at MainStreet Financial Planning, agrees that the range in one’s emergency fund does change depending on their unique circumstances. Someone who is single or the sole breadwinner in their marriage or relationship, Edwards said, would have closer to six months’ worth of income compared to someone who has a partner who also has an income.
Another important factor to consider is how you are paid by your employer.
“If you have a job that is commission based or contract based where the salary or income is variable or less dependable, you should likely have closer to six to nine months in your emergency fund,” said Edwards.
I’m a Financial Advisor: 10 Most Awesome Things You Can Do for Your Finances in 2024
Making Your Emergency Fund Too Accessible
Grant Gallagher, AVP, and head of financial wellbeing at Affinity Federal Credit Union, said it’s important to strike a balance of accessibility with your emergency fund. On the one hand, you want to be able to access this fund when you need it. On the other hand, you don’t want it to become so easily accessible that you start using the funds for non-emergencies.
To avoid making these two mistakes, Gallagher recommends keeping your fund in a short-term CD.
“Breaking your emergency fund into a few three-month CDs and laddering them will help ensure you’re still getting a decent return on your fund, while not making the whole amount accessible,” said Gallagher.
Gallagher also recommends looking into liquid savings accounts with a reverse tier structure.
“These accounts are great if you are just starting out building your emergency savings, as they typically have a high rate for the first few thousand dollars with no minimums or penalties for withdrawals,” said Gallagher.
Not Building Your Emergency Fund Into Your Budget
Few Americans are in the position to immediately put the full three to six months’ worth of expenses into an emergency fund right now. This means most Americans will be gradually adding to this fund — which means it should be a line item in your budget.
Gallagher recommends taking the extra step of automating your contributions to this fund. Once you meet your emergency fund savings goals, Gallagher said you can shift this automated savings elsewhere such as putting it towards your child’s savings or retirement.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Avoid These 3 Emergency Fund Mistakes in 2024
