Emergency Savings – Here’s What You Really Need

3D Illustration of a Piggy Bank and a Stethoscope

Costs related to an unexpected illness or accident can spiral. Here’s the truth about savings in America: We all talk a lot about how much we should be saving and spending, but the majority of us don’t save enough to pay for a surprise expense that must be covered immediately.

More than 60% of Americans don’t have enough money stashed away to pay for unforeseen expenses such as a $1,000 visit to the emergency room or a $500 fender-bender, according to a Bankrate.com study.

The same survey found that 82% of us keep household budgets — mostly with pen and paper or in our heads, but we look to outside help to pull us out of a financial crisis.

Staying afloat after a job loss.

We also seem to have a blind spot about how much emergency savings we actually need. Most financial experts will tell you to stockpile three to six months of paychecks in an interest-earning account like a money market that you can get your hands on without tax or early-withdrawal penalties. But what many unwittingly discovered after job layoffs in the depth of the recession was that three to six months of paychecks for emergency savings wasn’t nearly enough when unemployment lasted six to 12 months, sometimes even longer. It also matters if you’re single or if you’re part of a two-income household, and if you rent or if you own a condo rather than a house.

Cushioning the blow of surprise expenses.

Gauge your emergency savings needs not just on income — but on what you own and what replacement costs might be. How much would a replacement roof be? What about a new transmission in your car? How about a health emergency? It’s the most feared and pricey crisis Americans face and for good reason, since it’s the #1 cause of bankruptcy.

You should be allocating emergency savings into three tiers: minor emergencies, major emergencies and job-loss protection.

  • Minor emergencies

They’re what you’d expect: health-care deductibles and negligible car and home repairs. But be sure you are prepared to cope with multiple minor emergencies around the same time. For example, there could be a domino effect of emergencies, like a car crash could lead to a broken leg and an unexpected car insurance deductible as well as a healthcare deductible.

  • Major emergencies

The good news is that major emergencies don’t happen with the same regularity that minor ones do. A key premise here is that the cash you have on hand — a liquid asset, can be used for any major emergency. The caveat for those with health savings or flexible spending accounts is that those accounts can cover health costs but are hands off for other emergencies.

  • Job loss

In general, there’s a 10% probability that any one of us could lose their job in any given year, according to the Bureau of Labor Statistics. Those numbers, of course, are skewed during recessions and economic hiccups like we’ve seen in recent years. In these cases, according to the BLS, more than 10% of those who are jobless need more than a year to find employment.

Add that all up and the advice is to save enough to cope with a year of unemployment. That’s a tall order, but remember you don’t have to do it all in one year and it doesn’t necessarily mean a year’s worth of paychecks – but rather a year’s worth of expenses covered. Unemployment insurance is considered too. In two-income families, it’s unlikely that both people will lose their jobs during the same year, but they should be covered as if the higher income gets knocked out of the equation.

Hopefully you will never need to worry about most of the items on this list, but it’s always better to be financially prepared and plan ahead when you can!

Article Source: Jennifer Waters, http://www.cuinsight.com/emergency-savings-heres-what-you-really-need.html

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