In recent weeks, I’ve taken a close look at USAA’s seven core advice principles in the context of setting yourself up to, yes, thrive through financial challenges in 2025.
I’ll start by tipping my cap to the idea that life throws curveballs. The economy aside, unplanned trips home to check in on sick parents, unexpected PCS moves and, of course, the oh-too-common car repair: All of these unforeseen events can wreak havoc on even the most meticulously planned budgets.
I’m sure you could list a few similar surprises that have affected you and your family. On the whole, Americans seem unprepared for those inevitable hiccups. Last summer, the Federal Reserve released its Report on the Economic Well-Being of U.S. Households in 2023, having found that nearly 40% of Americans couldn't cover a $400 emergency expense with their savings. This alarming statistic highlights the critical importance of an emergency fund.
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A readily accessible pool of cash provides a crucial buffer against financial shocks, allowing you to navigate challenges without resorting to high-interest debt. Think of it as your own personal insurance policy against the unexpected.
Why Is an Emergency Fund So Crucial?
1. It reduces reliance on debt.
Borrowing money at high interest rates, such as from credit cards, can quickly spiral into a cycle of debt. According to Investopedia, the average credit-card interest rate in January 2025 was more than 24%. Carrying debt at this rate can significantly impact your long-term financial health. An emergency fund can eliminate the need to incur such debt during unforeseen circumstances.
2. It provides peace of mind.
Knowing you have a financial safety net in place can significantly reduce stress and anxiety. The American Psychological Association’s Stress in America 2024 study found that financial worries -- reported by 64% of adults -- is a major contributor to overall stress levels.
3. It protects long-term financial goals.
Unexpected expenses can derail long-term financial goals, such as saving for a down payment, retirement or your children's education. An emergency fund can help ensure you remain on track to achieve your goals.
How Much Should You Save?
Typically, I go “by the book” and recommend keeping the equivalent of 3-6 months of your core living expenses in your emergency fund. Of course, this amount can vary depending on individual circumstances. My go-to example as a reason to build or maintain a larger emergency fund relates to leaving the military. As it can take time to find your next job, building up a bigger stash could make sense as you prepare to take off the uniform.
Here are some tips for building your emergency fund:
- Start small and be consistent. Even small, regular contributions can add up over time.
- Automate your savings. Set up automatic transfers from your checking account to your savings account to make saving effortless.
- Identify and cut unnecessary expenses. Find areas where you can reduce spending and divert those funds toward your emergency fund.
- Use pay increases to turbocharge your savings. The military community just experienced a nice raise in January, and junior folks received a big boost in April. Earmark a portion of those types of raises to your emergency fund or other savings.
Building an emergency fund may seem daunting initially, but the peace of mind and financial security it provides are invaluable. By taking proactive steps to prepare for the unexpected, you can navigate life's challenges with greater confidence and achieve your long-term financial goals.
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