12-Month Emergency Fund: Is It Necessary or Overkill? - The millennial money couple (2024)

• Ashley Isreal

• August 13, 2023

• Money Management

As we enter a new era of economic uncertainty, ensuring our financial security’s more important than ever. One way to do this is by having an emergency fund in place. But how much should you save?

The standard advice is six months’ worth of expenses, but some financial experts suggest having a 12-month emergency fund. In this blog post, we’ll explore the importance of having a 12-month emergency fund and help you decide if it’s necessary or overkill.

What is a 12-month emergency fund, and what are the benefits?

First of all, what exactly is an emergency fund? Simply put, it’s money set aside for unexpected expenses, such as a job loss, medical emergency, or car repair. Most people aim to save six months’ worth of expenses, but this might not be enough in certain situations. A 12-month emergency fund can provide greater peace of mind and protect you from financial hardship in the event of a prolonged crisis.

One of the key benefits of a 12-month emergency fund is that it can help you avoid debt. If you experience a sudden income loss or unexpected bill, you won’t have to turn to credit cards or loans to cover the cost. This can save you a lot of money in interest payments and prevent your debt from spiraling out of control.

Another advantage of a 12-month emergency fund is that it can give you more flexibility and security in your career choices. With a larger cushion of savings, you may feel more comfortable taking time off work to pursue a new opportunity or start your own business. You won’t have to worry about paying the bills while you take a risk that could ultimately pay off.

Of course, saving up 12 months’ worth of expenses isn’t easy. It can take several years of disciplined saving and careful budgeting. You may need to make sacrifices in other areas of your life, such as dining out less, canceling subscriptions, or downsizing your living space. However, the long-term benefits of having a 12-month emergency fund are worth the effort.

So, is a 12-month emergency fund necessary or overkill? The answer depends on your individual circ*mstances. If you have a stable job with good benefits and a low risk of income loss, a six-month emergency fund may be sufficient. However, if you have a more precarious employment situation, dependents to care for, or a high level of debt, a 12-month emergency fund may be a smart choice. Ultimately, only you can decide how much savings you need to feel financially secure.

7 compelling reasons to save in today’s economy

1. The Economy Is Not Safe Due to the Major Layoffs: The current economy is unstable due to the numerous layoffs that have occurred. This means it’s more important than ever for individuals and families to create an emergency fund in case of future job loss or financial hardship. In 2022 and 2023 alone, we have had over 20 million Americans lose their jobs.
2. Inflation Can Erode Your Purchasing Power Over Time: It’s important to continually save your money to maintain or increase your purchasing power. Inflation has increased steadily over the past few decades, and it can erode the value of your money. Interest rates have surged to unprecedented levels, resulting in elevated inflation rates.
3. Daycare Rates Are Much Higher and Expenses for Children in General: The cost of raising children has skyrocketed, and the cost of daycare is no exception. Daycare services are one of the major expenses for families with young children, and saving can be a great way to cover these costs and protect your finances. Currently, the cost of daycare can be as much as some people’s monthly mortgage payments.
4. Tax Increases Are Likely: Taxes have been steadily increasing over the years, so it’s important to save money for potential tax increases. With increasing tax rates, it’s essential to have an emergency fund in case of any unexpected expenses or liabilities.
5. Save Money For Retirement: The sooner you start saving, the better off you will be when it’s time for retirement. With people living longer and inflation on the rise, individuals need to save more than ever. Many young people, particularly Millennials and Generation Z, worry that Social Security may not be available when they need it. This is a significant concern, which is why saving money for retirement is essential.
6. Saving Can Help You Achieve Major Life Goals: Everyone wants to buy a car, take a vacation, or purchase a home. Your emergency fund will help you achieve these goals without the need to take out loans or rely on credit cards. With a large emergency fund, you’ll have the resources to make these dreams come true without sacrificing your long-term financial security.
7. You Have Increased Peace of Mind: Having a 12-month emergency fund in place gives you and your family peace of mind knowing that if something unexpected happens, there is money available to help cover the cost.

7 steps to get started with saving a 12-month emergency fund

1. Figure out your expenses: The first step to saving a 12-month emergency fund is calculating how much money you need to cover your costs for the following year. Make sure to account for all essential expenses, including rent or mortgage payments, utilities, insurance bills, and food costs. Even calculate miscellaneous materials that you would need such as gas, transportation, medical care, and more.
2. Determine your timeline: Once you have a rough estimate of the money you need to save, it’s time to set a timeline. If you want to build up your emergency fund over the course of 12 months, divide the total cost by 12 and make that your monthly savings goal. You can also set a longer timeline if you prefer.
3. Assess your current finances: Before you start saving, take an honest look at your current financial situation. Are there any expenses you can cut to free up more money for savings? Are there any strategies you can use to boost your income? Take the time to make a budget and identify areas where you can save money.
4. Set a goal: Once you have an idea of how much you need to save, set a specific goal for yourself. Be realistic and allow enough time to build up your fund gradually.
5. Open a high-interest savings account: When it comes to emergency funds, you want your money to be both safe and accessible. That’s why it’s best to keep the fund in a high-interest savings account; this will help you earn more interest on your savings without sacrificing liquidity.
6. Automate your investments: Putting your savings in stocks or bonds can help you grow your fund faster. Look into automated investing services, such as robo-advisors, to get started.
7. Monitor your progress: Keep tabs on your emergency fund and adjust your budget or savings routine as needed. By tracking your progress, you’ll be better prepared for any surprises life throws at you.

An emergency fund is a vital component of any financial plan, but the amount you should save can vary based on your needs and goals. While a 12-month emergency fund might seem excessive to some, it can provide a greater level of security and flexibility in the face of unexpected events. Whichever approach you choose, the key is to start saving now and make emergency savings a top priority. Your future self will thank you.