The Big Reason Everyone Should Rethink Their Emergency Funds Right Now

You don't want to be caught unprepared.

An emergency fund doesn't seem that important until your financial security depends upon it. And since emergencies don't crop up every day, it's easy to throw a little cash in your savings account and then forget about it. But this is a dangerous oversight, especially now. Here's why you need to take a few minutes to review your emergency fund as soon as possible.

How far will your emergency fund actually go?

It's good practice to review your emergency fund at least once per year or whenever you experience a major financial change to ensure you have enough money set aside. This is especially important right now with costs climbing rapidly due to inflation.

Expenses have gone up by about 8.3% over the last year, according to the Bureau of Labor Statistics. That means if you needed about $10,000 in your emergency fund a year ago, you'd need $10,826 right now to have the same buying power. And there's a chance this number could climb even higher in the coming months.

If you don't reconsider your emergency fund regularly and as needed, you might not have enough money to cover all of your costs if you lose your job or face a surprise bill in the near future.

How to update your emergency fund

First, make note of how much you already have in your emergency savings. If you keep your money in a high-yield savings account, you might have a little more than you initially deposited because you earn interest on your money. Keep this information handy.

Now, think about how much you'd like to save. You should keep at least three months of living costs on hand, but some people feel more comfortable with six or 12 months of savings.

Once you know how many months of savings you need, you have to estimate your current monthly costs. Review your recent bank and credit card statements and don't forget to factor in irregular expenses, like car insurance premiums. Resist the temptation to rely on old budgets you might have made. The costs listed there might be outdated.

When you have an idea of your monthly costs, multiply this by the number of months of savings you want. For example, if your monthly costs are $3,000 and you want to save three months of living expenses, you'd need $9,000 in your emergency fund.

Now, subtract the amount you already have in your emergency fund from the total you'd like to save. So if you have $8,000 already, you'd only need to save another $1,000 more to meet your $9,000 target.

Then, it's time to make a plan. Decide how much cash you can afford to set aside every month and see if you can set up an automatic transfer to your savings account. If not, set a reminder for yourself so you can remember to do it manually.

Make it a habit

Reviewing your emergency fund doesn't have to take long and you shouldn't just do it once either. You may want to check it again in a few months since we're experiencing record inflation right now. Then, set a reminder for yourself to review it again next year. If you get a new job or add a new member to your family, that's also a good time to look over your finances.

Don't forget to replenish your emergency fund after you dip into it too. Make a note of how much you've withdrawn and try to replace that money as quickly as possible. You never know when the next emergency will arise.