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You'll often hear that building an emergency fund is the most important financial move you can make. Without money in your savings account, you might instantly fall into debt or suffer with other consequences the moment an unplanned expense pops up.
Last November, 32% of Americans said they were ill-equipped to cover a $400 emergency expense. But this year, that number has risen to 49%, according to a YouGov survey for the Economic Security Project conducted online between May 20-23, 2022.
Now to be fair, as is the case with many surveys, this one had a limited sample size, so the findings may not truly be indicative of the state of Americans' savings on a whole. But still, it's clear that more Americans are having trouble covering unplanned expenses than in the past.
Why are Americans in worse shape now, savings-wise?
It's easy to see why fewer Americans have cash reserves in the bank now compared to last November. Living costs have been soaring over the past six months due to inflation, and wages aren't rising at a steady enough pace to keep up. That's no doubt forced many people to dip into their savings rather than reserve that money for other purposes.
How much money should your emergency fund have?
The fact that 49% of Americans couldn't rely on cash savings to cover a $400 expense is troubling -- especially when we consider that $400 isn't even close to the amount most people need for a solid emergency fund. Ideally, your emergency fund should have enough money to cover a minimum of three months of essential expenses. Some financial experts, however, advise socking away enough cash to cover six months to a year's worth of bills.
How to boost your emergency fund
If your savings situation is such that you couldn't easily pull $400 out of the bank to cover an unexpected bill, then it's definitely worth putting some effort into boosting your cash reserves. Of course, doing so is easier said than done at a time when living costs are spiking. And cutting back on spending is advice that's only applicable to some people. If you're already living very frugally, that may not be an option for you.
But there's an option you can take advantage of -- joining the gig economy. Even though inflation is making life difficult for many Americans, the job market is strong and the gig economy is thriving. That means you have a solid opportunity to take on a second job or a string of side hustles that make it possible to boost your income. And that way, the extra money you bring in can be used to beef up your emergency savings.
What’s more, even if you have more than enough cash on hand to cover an unplanned $400 bill, you might still consider boosting your emergency fund so you have added financial protection. If you currently have enough cash to cover three months of bills, consider ramping up to four months' worth.
Right now, inflation is making it difficult for many people to cover their expenses, so it's a tough time for anyone to be saving money. But if your emergency fund needs work, then it's important to do your best to find ways to save -- before your next unplanned bill pops up when you least expect it.
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