Emergency Funds: When to Give Them a Checkup

Inflation is front and center wherever we turn. The cost of groceries, filling up the gas tank, and paying the utility bill are all a lot more expensive than they were a year ago. Those of you who rent are likely facing much higher renewal rates.

I am sorry to say that all of that might mean you should consider boosting your emergency savings fund as well.

I realize this is lousy timing. The last thing you need when your paycheck is already being stretched by rising costs is a suggestion that you also boost your savings. But I know you rely on me for the best possible advice to build and maintain financial security.

And that likely means raising your emergency savings target if your essential living costs have increased.

I recommend that you take the time to go through your bank and credit card statements for the past three months and work out a fresh estimate of your monthly essential living costs.

If you can’t boost your savings right now, that’s okay. Just put it on your short list of goals you intend to tackle when you have some extra cash flow.

You know that my hope is that you work your way toward having enough set aside to cover 12 months of essential living costs. And you also know that I realize that can take time. Every month you move closer to your (new) goal, is a month to celebrate your progress.

If you can manage to boost your savings, please don’t delay. The risk that we may be sliding into a recession in the coming months has risen along with the latest move by the Federal Reserve.

Because the rate of inflation has continued to be way too high—it was 8.6% in May—the Fed recently raised the interest rate it controls by 0.75%. That was a very big increase—0.25% is the more typical size of any change up or down—and the Fed may need to keep raising its rate as a way to deal with inflation.

The Fed’s goal is to make the cost of borrowing high enough that businesses and consumers stop borrowing and spending so much, which would help ease the rate of inflation. But there’s the very real problem that in trying to bring down inflation, the higher interest rates cause business spending and consumer spending to slow down to the point that the economy is in a recession. And that typically means unemployment will rise.

The more you have saved in your emergency fund, the better prepared you will be to deal with whatever the economy throws our way in the coming months.