It is an aggressive position, but understandable.
- It is important to have savings for unexpected expenses and situations.
- Although an eight-month emergency fund might seem like overkill, there’s a reason one financial expert recommends it.
- The pandemic has shown the financial impact of a crisis, and many people have been negatively affected by the lack of savings.
For years, financial experts have said it’s important to have money in a savings account for emergencies. That way, if you lose your job or run into a costly situation you didn’t expect, like a sudden home repair, you’ll have money to tap into. And you won’t have to rack up costly debt to cover the expenses or scenario you’re facing.
Until the pandemic, the general consensus was that everyone should aim to have an emergency fund with enough money to cover three to six months of living expenses. And financial guru Suze Orman used to think that way too.
But Orman has since changed his tune on the emergency savings front. And you might want to follow his updated advice.
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Why You Might Need More Emergency Savings
The logic behind a three to six month emergency fund was to have enough money to get through a period of unemployment. But in the wake of the pandemic, Orman upped his recommendation for an emergency fund from eight to 12 months after seeing how long some people were out of work in 2020.
Certainly, the COVID-19 pandemic was an extreme situation, as the nation (and the world) faced an unprecedented health crisis. But it is not unreasonable to think that a similar situation could happen again. So while an eight-month emergency fund may seem excessive, the reality is that it can also be very useful during a major crisis.
And to be clear, this crisis does not have to be national or global. It can also be personal.
Imagine you become ill and are unable to work for eight months while recovering from surgery or treatment. If you are the sole breadwinner in your household, you may need a full eight months of living expenses in the bank to get through this period without having to go into debt.
How to boost your emergency fund
Maybe you managed to save six months of living expenses in the bank and thought you were ready to save some emergency money. The thought of having to save a few extra months of bills can seem daunting.
But remember, just like you didn’t build your original emergency fund overnight, you can also take your time building up your cash reserves. In fact, if you already have three to six months of spending in savings, that should take a lot of the pressure off and allow you to slowly but steadily build up your balance.
In terms of strategy, look at your current expenses and see which ones you can cut most easily. If you really don’t want to cut your expenses, get yourself a second job for a few months and bank the extra wages you earn.
An eight-month emergency fund can seem like a lot of money to keep in the bank. But anyone affected by the COVID-19 crisis will probably tell you that if they had had that much money in savings, the situation would have been much easier to manage. And so if you want real protection, it’s a good idea to follow Orman’s advice.
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