You are currently viewing Here’s how to build an 18-month emergency fund

Here’s how to build an 18-month emergency fund

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An emergency fund is pretty much what it sounds like – a financial cushion set aside in case something unexpected happens to you, from losing a job to having to pay a sudden big expense. While common advice recommends having around a six month fund, if the pandemic has taught us anything it’s that sometimes it may be necessary to have a much larger sum of money on hand, such as 18 months.

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Although most people are unlikely to need an 18-month emergency fund, Danielle Miura, CPF, Founder and Owner of Spark Financials says, “If someone decides to quit their job and become self-employed, an 18 month fund might be what they need to grow their business in the first year and have enough cash on hand in case things go wrong. Here are some tips for someone like that.

Why saving for 18 months is wise

According to Brian Dechesare, founder of Breaking Into Wall Street, a financial career platform, saving for longer than the conventional six months is a good idea because we are going through a huge period of transition.

“[The transition] applies to finance, economics, but also on a broader cultural and societal level, we are in the midst of huge change and no one can know exactly how things will play out… plus the uncertainty and the flows in the world are great, the longer our economies are and the reserves should be.

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He points to factors such as 40-year highs in inflation, war in Europe, huge increases in the cost of oil, gas and electricity, as well as the threat of food shortages due to chain problems. global supply. “All of this is on top of the very real threat of an economic recession. Building long-term savings in such a scenario will always be a smart move.

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Create a budget

But how do you achieve such savings? According to Shelly-Ann Eweka, Senior Director of Financial Planning Strategy at TIAA, no matter how big your emergency fund goal is, “The most important thing is to start by creating a budget that shows how much you can afford. save money. Once you have your budget, you should automatically set aside money from each paycheck for the emergency fund. In other words, pay yourself first.

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She recommends using financial apps or software to better understand where you’re spending your money.

Calculate your monthly expenses

Before you know how much to save, you need to know how much you’re spending, then multiply your monthly expenses by 18. If your monthly expenses are $4,000, for example, you need to save $72,000, says Scott Lieberman, owner and founder of Touchdown Money.

It’s helpful if you have an end goal, he says. “Find out when you need your emergency fund. If you don’t plan to open a business for three years, you can focus on saving $2,000 a month to reach your goal. The key here is knowing when you’ll need that money and how much you need to save each month.

Decrease spending

Once you know how much you’re spending and how much you have left to save, you have the ability to reduce your expenses, says Eweka. “You will be surprised at the things you buy. Instead of buying lunch every day, can you cook lunch at home and bring it to work? Are you paying for a gym membership that you haven’t used in three months? Maybe start exercising at home or jogging with friends.

Create a dedicated account

Saving for an emergency fund can also be more effective if you set up a separate bank account and are aggressive with your savings. Miura says, “I suggest…that you transfer a percentage of your earnings to the account. If you want to be aggressive about saving as quickly as possible, make saving a priority.

Save all the extra money

If you’re lucky enough to earn tax refunds, cash gifts such as birthday gifts, or job bonuses, Lieberman recommends putting that money directly into savings.

Automate savings

The easiest way to save money before it’s spent is to automate it, says Carl Jensen, financial consultant and founder of Money Mow. “Build a savings strategy you don’t have to worry about. Figure out how much money you’ll need…and ask the bank to deposit a specific amount into a different account each week. This can be done until you reach your goal or indefinitely to create a bigger buffer for future possibilities.

Invest Savings

The least efficient way to grow money is to put it in a low-yielding savings account, says Jensen, so consider other options.

“Once you have reached your end goal, you must stop contributing to this account. Instead, start putting money into an account that will start producing money on its own – ideally one of your retirement accounts, where it will pay off the most over time. .

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Support additional work

Sometimes the only way to earn enough money to save more is to take on extra work. Adam Garcia, founder of The Stock Dork advocates taking a part-time job rather than starting a side hustle. “On the one hand, the salary of a part-time job is often more constant. Second, it will take you less time to start earning enough money to make a significant difference in your savings.

Consider inflation

The only downside to saving so much is that you’re essentially wasting money on your money by keeping it in savings due to inflation, says Eweka. “Just compare gasoline prices today to what they were a year ago. If you set aside, say, $100 in 2021, will that $100 earn you as much now as it did last year? »

If you have time to spare, consider investing that money instead.

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About the Author

Jordan Rosenfeld is a freelance writer and author of nine books. She holds a BA from Sonoma State University and an MFA from Bennington College. His articles and essays on finance and other topics have appeared in a wide range of publications and clients including The Atlantic, The Billfold, Good Magazine, GoBanking Rates, Daily Worth, Quartz, Medical Economics, The New York Times , Ozy, Paypal, The Washington Post and for many commercial customers. As someone who had to learn a lot of her money lessons the hard way, she enjoys writing about personal finance to empower and educate people on how to make the most of what they have and how to live. a better quality of life.

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