Should You Increase Your Emergency Fund When Inflation Rises?

Inflation has been in the news a lot in recent years due to its rampant nature. Now, the reality is that moderate inflation is sort of a consistent part of the economic cycle. But the inflation we've experienced more recently has been enough to drive living costs up notably.

In February, annual inflation was measured at 3.2%, per that month's Consumer Price Index (an index that tracks changes in the cost of common consumer goods and services). And while that's an improvement over the inflation levels we saw in 2022, it's still high.

If you have money in an emergency fund, you may want to reassess your savings and add to them in light of this recent stretch of inflation. Here's why.

It's all about making sure you're covered

Generally speaking, your emergency fund should contain enough money to cover three full months of essential expenses at a minimum. If you decide to save beyond that for better protection, great.

The reason it's important to add to your savings account during periods of inflation is that the cost of your essential bills might rise. You may need to pad your savings to make sure you can continue to cover three months' worth of bills.

As an example, let's say that at this time last year, your essential monthly bills came to $3,000. What if now, due to inflation, you're spending more like $3,200 on essentials because the cost of things like groceries, rent, and utilities has risen on you?

If you have a $9,000 emergency fund, you're still in good shape. But do you have enough money in the bank to cover three full months of essential bills? No.

Now, based on that recent increase, you'd need $9,600 to be covered for three months of bills. So in this example, it would be a good idea to try to add $600 to your emergency fund.

This isn't something you necessarily have to stress out over, or do immediately. But over time, it's a smart thing to do.

Keep checking in on your emergency fund

Even during periods when inflation isn't so rampant, it's a good idea to assess your emergency savings every six months or so to make sure you're getting enough financial protection. Even if inflation isn't an issue, perhaps your rent specifically goes up at some point because your landlord imposes a big increase. Or, it may be that your homeowners insurance rates rise due to an increase by your insurer.

If you're going to make an effort to build and maintain an emergency fund, it should give you the peace of mind you deserve to have. So keep checking in to make sure you're truly covered the way you want to be. And if you realize you're a little short, you can then take steps to calmly but efficiently add money to your savings so that in the event of a layoff or large unplanned bill, you're not left to scramble or panic.