What You Should Know About Your Emergency Fund During COVID

The good news: 2020 is behind us. The bad news: The pandemic and its economic challenges may follow us for a while, and some families have exhausted the emergency cash they’d usually lean on in if they found themselves in a bind.

It sounds good to say that we’re “all in this together” but honestly, that’s not always true. Our ability to work from home, find reliable childcare and build savings may not match our neighbor’s. Some families are in dire financial straits, while others may just need a quick check-in to confirm that their savings are on track.

One thing we can all do is take a breath and acknowledge that we’re doing our best in a challenging time. From there, we can take a clear look at our finances. 

What Is an Emergency Fund?

An emergency fund is a fallback in case of the unexpected, like a job loss or extended illness. Unsurprisingly, emergency funds are especially important for people with families.

Look up how much to save in your emergency fund, and you’ll probably get an unhelpfully wide range of responses. Some financial gurus recommend a minimum of $1,000. Many financial experts set the target anywhere from three to 12 months’ worth of your typical income. 

Part of the issue is defining what the emergency fund is for. Are you hoping to cover an unexpected, one-time expense in cash? Or are you preparing for a more extended period of financial difficulty? 

Ideally, of course, you’d have enough in savings to cover both unexpected bills and long-term emergencies. If saving is hard right now, it’s better to start small than give up because the target seems unattainable. In time, it might be worth opening two accounts so it’s easier to see at a glance what you’ve allocated for one-time expenses and what you have available for longer-term emergencies.

Short-term emergency cash

Having cash on hand to cover a hospital visit or a car repair can keep a one-time crisis from turning into a long-term financial problem. Fortunately, protecting yourself against one-time emergency expenses is easier than saving the three to 12 months’ worth of income experts recommend for a long-term savings fund.

“Building up such an extensive emergency fund in a short amount of time may not be realistic for many families. The key is to continue making progress and set aside what you can, no matter how small,” says Certified Financial Planner Drew Feutz. 

He cites a recent study that nailed the target savings amount down to the dollar: $2,467. The study’s authors based this figure on what a low-income family might need to stay on top of rent, bills and medical care. They also consider that lower-income families face obstacles that make them more vulnerable to hardship (like lack of generational wealth, compounding hardships when covering one unexpected expense leaves you unprepared for the next). 

If your family is middle-class, you might follow the same general process to arrive at your own numbers: Calculate your own monthly income or your healthcare deductible as your target, whichever is higher. That way, you can feel confident that you can handle a medical emergency or a few weeks without work.

Long-term emergency cash

If experts say you should save three to 12 months’ worth of income, how are you supposed to find your sweet spot in that range?

Feutz says to consider the factors that could influence how long you’d depend on your savings. “As we unfortunately saw throughout 2020, job stability is a major factor. Other things to consider when determining how much you should keep in an emergency fund are your employability… how much you spend monthly, and how much you could cut back if something happened.” 

Write out your usual household budget, then see which expenses you’d cut if you needed to. You can base your emergency savings on a belt-tightened month, rather than how you might spend when finances are normal. If losing your job would affect your insurance, or you have high deductibles, these can also affect how much you’d need to factor into what you’d need per month in an emergency.

Finally, think about your family and who else might be affected if you lost your job. How flexible could you be? If you’d be able to relocate for a job or even move back in with parents or friends if you needed to, you may be able to aim for the lower end of the three to 12 month recommendation. By contrast, a family relying on one income and hoping to keep kids at the same school should probably think about planning for a larger emergency fund.

What to Do If Your Rainy Day Savings Are Gone

Even families who saved diligently didn’t anticipate a pandemic that would affect schools and businesses for months on end. About 14 percent of Americans have burned through their emergency savings to make ends meet through the pandemic. The challenge is what to do if you’ve wiped out your savings, and the emergency isn’t even over.

“Some of the smartest ways that people can use stimulus money are to simply feed your family and pay your bills if you’re in a dire situation, set aside the money in an emergency fund if you need to add to your cash buffer, or to pay off high interest debt,” Feutz says. If you’re struggling to meet basic needs, you need solutions to cover essential expenses before you can think about rebuilding savings for the future.

If your savings are dwindling and you’re not bringing in enough money to cover essentials, try these options to get back on steadier financial footing:

• Track spending: If you’re not following a written budget, write one today. You might be surprised to find expenses you can cut.

• Update tax withholding: If you’re getting a tax refund, that means you overpaid taxes all year. Talk to HR or payroll staff to update withholding and keep more money in your paycheck.

• Home equity line of credit (HELOC) or personal loan: Although you don’t want to over-rely on debt for funding, Feutz says loans or a HELOC can provide a temporary emergency funding source. 

• Find unclaimed money: Official databases can help you prove and recover money from unpaid wages, insurance refunds, undelivered tax refunds and other sources. 

• Pause retirement contributions: Contributing to a 401(k) or other retirement plan is an important part of preparing for a secure financial future. If your current situation is dire, though, decreasing or pausing contributions for the short term is an option to consider.

• Consider borrowing or withdrawing from retirement funds: If you’re affected by disasters other than the coronavirus pandemic (e.g., California wildfires), you may be able to take an early distribution from qualifying retirement funds without the usual 10 percent penalty, as part of the Consolidated Appropriations Act, 2021. You’ll still have to pay income tax on the withdrawal.

• Call 211 or visit 211.org: This service offers confidential support for domestic violence or suicide crisis help, and in many areas, operators can also connect you with local help for essential needs like food, safe housing and affordable healthcare.

• Check if you’re qualified for financial assistance: National programs offer financial aid for people in certain industries (e.g. freelancers, gig workers, restaurant workers) or family situations (e.g. family members with cancer, families who lost a frontline healthcare worker to COVID-19).

Give Your Finances a Health Check-Up

While pandemic-related shutdowns and job losses wiped out savings for some families, others are actually seeing an increased bank balance. People who were fortunate enough to keep their jobs throughout the last year may have cut back on travel, dining out or other activities they’d normally spend on. If this sounds like your family, you may still be worried about whether you really have enough saved for an uncertain future.

Start by reassessing your savings goals. Run through your version of the personal finance factors Feutz mentioned — your job stability and ability to find a new position if you need one, how much you’d be able to reduce expenses if needed and how many people your income supports. Talk through numbers with a trusted financial advisor. You might realize you’d considered your emergency savings “fully funded” with six months’ worth of income, but nine months’ worth is a better reflection of what you might need.

If your emergency savings look good, get other finances in order. Check your life insurance coverage, consider disability insurance and check your progress on long-term savings like retirement and higher education savings for your kids.

If your financial house is in order and you’ve got money to spare, consider sharing with someone less fortunate. Charitable giving is a wonderful family value to teach your kids, and you may be able to contribute a small part toward helping your community recover from the pandemic.

It’s tough to say exactly how long we may still deal with pandemic-related changes to our routine from the “before times.” Developments like a vaccine feel like a hopeful sign that we may see brighter days ahead. In the meantime, save when you can and reach out for help when you need it. 

Even adding one new option to your list can better equip you to ride out a tough financial spot, and help your peace of mind.

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