How Much Should A Family Save For Emergencies in 2023?

Do you worry about being financially prepared for unexpected expenses or events? Are you tired of feeling stressed and anxious about your family’s financial stability in the face of the unknown? 

You’re not alone. 

Many families struggle with how much they should be saving for emergencies.

Without a solid emergency fund, even a minor financial setback can mess up your budget. But fear not!  In this article, you’ll discover everything you need to know about emergency funds including how much a family should save.

What’s an Emergency Fund?

It is an amount of money set aside in case of an unexpected financial crisis. This reserve can help you survive calamities such as:

• Job loss
• Medical bills
• Car Repair

Having a backup plan gives you peace of mind and gets you ready for potential disasters. 

That said, you shouldn’t confuse an emergency fund and a savings account. The only purpose of an emergency fund is to provide financial security during times of need.

With an emergency fund, you won’t have to keep borrowing from friends and become a laughing stock, dip into your savings or take out a loan when the worst happens. 

You’ll have the resources to cover the costs.

Read Also: What’s an Emergency Fund and Why You Need One.

How Big Should an Emergency Fund Be?

The money you need to set up an emergency fund depends on your unique circumstances. Experts recommend setting aside three to six months’ worth of your living expenses. 

But as already said, the right amount depends on individual needs. Some things to keep in mind when determining the size of your emergency fund include:

• Your income: If you have a high income, you might not need a big emergency fund since you have a higher safety net to fall back on. But if you have a low income, you may aim for a larger emergency fund to provide more financial security.

• Your expenses: The more expenses you have, the more you’ll need to save in your rainy day fund.

• Your risk tolerance: If you’re comfortable taking on more financial risk, like loans, you may feel comfortable with a smaller emergency fund. But if you’re more conservative, you may want to save more to feel more financially secure.

Read Also: Easy Steps to Create an Emergency Fund In 100 Days.

Where do You Keep the Money?

There are a few different options for where to keep your emergency fund, and the best choice will depend on your individual needs and financial goals. 

Here are a few options to consider:

1. Interest-earning savings account

An interest-earning savings account is a safe and easily accessible place to store emergency funds. Look for a high-yield savings account so that your emergency funds earn interest. 

2. Money Market Fund

Money market funds invest in low-risk avenues and can be a good way to store your emergency funds while earning interest. The good news is that they process withdrawals with short notice and are regulated by the Capital Markets Authority (CMA).

3. Bonds

Bonds offer higher interest than savings accounts and money market funds. When you buy a bond, you’re lending money to a government or corporation in exchange for interest payments and dividends. Bear in mind that bonds lock your savings for a certain duration. If you withdraw before maturity, you may incur losses.

4. Stocks

You can also invest your emergency funds in stocks. However, this can be a risky venture because the stock market can be volatile and is subject to fluctuations. As such, diversify your portfolio, set stop losses, and regularly review your investments to limit losses.

5. SACCOs

SACCOs offer a range of products including a savings account that you can use to grow your emergency funds. They often offer competitive rates.  However,  there are also risks involved.  Check the fees and terms associated with SACCO and its financial stability.

Read Also: Where Do I Keep My Savings? The 7 Main Places to Put Your Savings.

How Can You Achieve Your Target?

Achieving your emergency savings target can take time. Don't worry. Here are a few strategies to help you reach your goal.

1. Set a Budget

A budget will help you know how much you need to save toward your emergency fund each month. To create a budget, list all your monthly expenses, income sources, and saving goals. Subtract your expenses from your income to determine how much to save each month. Knowing how much you spend each month could help you identify potential areas to cut back. 

2. Cut spending

Look for ways to cut expenses and use the money you save to grow your emergency fund. It can be challenging at first, but once you make it a habit, you’ll save more money faster.  

Start by making small changes like cutting down on entertainment expenses such as going out for drinks or movies. You can also cancel tv subscriptions or move to cheaper options. 

Lastly, shop around before purchasing as you may find cheaper alternatives.

3. Find other income streams

An extra source of income will boost your savings.  You can increase your sources of income by:

• Taking on a second job or freelancing
• Selling items you no longer need online.
• Starting a drop shipping business
• Asking for a raise.
• Invest in stocks and mutual funds. 

Read Also: 6 Ways to Stay On Track With Your Saving Goals.

When Should You Dip into Your Emergency Funds?

Only use your emergency funds to pay for true emergencies. Some examples of situations that may warrant the use of your emergency funds include:

• Medical bills or unexpected medical expenses: If you or a family member experiences a serious illness, you may need to pay medical bills.

• Job loss or reduction in income: If you lose your job or if your income reduces, you can use your emergency fund as you look for alternatives.  However, remember to refund it once calm is restored. 

• Home or car repairs: If your car or home needs repair and you cannot pay out of pocket,  use your emergency savings as well. 

• Natural disaster: If you're affected by a disaster such as demolition, floods, or a fire, your emergency fund can provide you with money for housing, food, and other necessities.

• Unexpected travel expenses: If you or a family member need to travel abroad urgently, you may need to use your emergency funds to cover the cost of flights, hotels, and other travel expenses. 

Also Read: How to Figure Out If Someone Is Worth Spending On.

Wrapping Up

In sum, it’s crucial to have an emergency fund to provide a cushion in case of unexpected expenses or loss of income. 

The amount you should save depends on your income, expenses, debt, and the level of financial security you’re comfortable risking.

Lastly, only use your emergency fund for true emergencies and always include them in your budget.