Do You Do a Yearly Emergency Fund Checkup? Here's Why You Should

A recent survey by SecureSave found that 63% of Americans don't have enough cash on hand to pay for an unexpected $500 expense. So if you're someone who has a far more robust emergency fund than that, you're in good shape. (And if not, you can always do your best to build up more savings over time.)

The general convention is that it's a good idea to have an emergency fund with enough money to pay for three months of essential expenses -- things like rent, groceries, utilities, and healthcare. That way, if you were to lose your job, you'd have a way to pay your bills for a few months without immediately having to resort to debt.

It's also a good idea to build a three-month emergency fund in case a major home or car repair comes up unexpectedly. The logic is that if you have enough money in the bank to pay for three full months of essential bills, chances are, you have enough to cover the $2,500 to $5,000 it might take to replace your vehicle's transmission, just as one example.

Of course, it's a good idea to try to replenish your emergency fund as quickly as possible after taking a withdrawal. But what if you haven't touched your emergency fund in well over a year? You might think that in that case, there's nothing to do. But you'd be wrong.

It's really important to assess your emergency fund from one year to the next. If you don't, you might end up short on cash when something goes wrong.

Why you need to do an annual emergency fund checkup

We just talked about the fact that your emergency fund should, ideally, contain enough money to pay for three full months of essential bills. But as we all know, living expenses have the potential to rise from one year to the next. And it's important to make sure you're padding your emergency fund as your living costs rise.

Let's say you were paying $1,200 a month in rent in 2022. If your rent increased to $1,280 this month, it means you might need an extra $240 in savings to ensure that you can pay for three full months of bills.

Also, maybe you signed up for home internet service on a promotional basis last year, so your cost was $40 a month. If it's now $60 a month because your promotion ran out, that's an increase your emergency fund should account for. (And yes, while your emergency fund is meant to cover essential bills, it's easy to argue that internet service is something you can't do without. If you were to lose your job, you'd probably need it to search for a new one.)

A yearly review could go a long way

You made sacrifices to build yourself a fully loaded emergency fund, so you no doubt want it to be adequate. So carve out an hour once a year to assess your savings and make sure you have enough cash for three months of bills.

In a nutshell, all you really need to do is make a list of your current essential expenses, see what they cost, and compare that to the amount you have saved. It may be that you're actually just fine on emergency savings despite an increase in your bills, because your money earned a lot of interest in your high-yield savings account over the past year. But it's still a good idea to check, so you have the peace of mind your emergency fund is supposed to give you.