Emergency savings funds are important as they work to keep people experiencing emergencies out of debt. Establishing one is worthwhile as it holds people accountable for spending and saving habits. Best of all, it creates peace of mind knowing there is a cushion should one fall.
Save up!
Professional financial experts suggest that people have three to six months’ worth of living expenses saved in the form of an emergency fund. Note that some experts say that business owners, those with variable incomes, and some single income earners might require nine to 12 months savings.
What is an emergency savings account?
This is an account that contains money you intend to use only when tough financial situations arise, such as the loss of a job, medical expenses, and emergency car and home repairs as examples.
How much should people save?
Folks are told to tally up how much they spend per month on necessities such as mortgage or rent, insurance, groceries and more. To arrive at a total number, multiply the total cost of your monthly essential expenses by the number of months that you’ll need the money to carry you through.
It’s not easy!
Building emergency savings can be challenging for people who work hard yet live paycheck to paycheck. And it can be particularly tough for those who are retired, unemployed, live on tight fixed incomes, or currently have debt. Since having emergency savings is important, people should do their best to try to build one – even if it means doing it slowly. When saving, know that every little bit helps.
Creating a savings goal
Think about how much you’ll require to keep going for three to six months should a catastrophe occur that requires you to rely on savings.
Establishing a savings account
Building emergency savings requires a safe place to save your money. You also need immediate access to that money when in need. A high yield savings account is a good starting point.
What does high yield mean?
High yield savings accounts are ones that pay more interest than typical ones. These accounts are generally viewed as safe places to keep money. They also offer instant access to funds.
It’s a good idea to make sure your bank account is insured through the FDIC (Federal Deposit Insurance Corporation) or the NCUA (National Credit Union Administration.) These two institutions are American-backed ones that provide deposit insurance.
Should you wish to invest your money differently, contact your professional financial advisor for guidance and to understand investment risk tolerance levels. People should not want to tie up their emergency savings. Funds must be available when needed.
An advantage
Consider setting up a direct deposit. Having money directly deposited into your savings account on a regular basis can help folks prioritize and build savings. Understand that this money is designated for life’s unexpected events and otherwise should remain untouched.
Putting money into emergency savings
What it should cover:
Emergency savings should cover unexpected incidents that significantly disrupt life. Job loss is one example. The point of emergency savings is to cover basic needs. Let’s review examples:
- Food/water
- Shelter/mortgage/rent
- Utilities
- Essential health expenses
- Basic clothing
- Required transportation/auto charges
- Child/pet care needs
Cut spending
Small budgets and tight markets necessitate careful spending. Thus, to save, non-essential spending must be cut. Non-essential spending can include movies, dinners out, jewelry, extra clothing, etc.
Restricting credit card use
Credit cards allow people to buy things without having the money upfront. Sounds great, right? Not so fast. When a credit card is used and not paid off in full, interest can accrue and compound. And, if one skips payments or stops paying, they will likely encounter some of the following: late fees, fines, higher rates, penalties, and even lawsuits. Skipped payments or non-payments also negatively impact credit scores, making it harder to borrow money in the future. Credit card debt should be avoided as it can also harm one’s ability to save money for emergencies.
Understanding inflation
Inflation is an increase in the prices of goods and services in an economy. It corresponds with purchasing power. High inflation rates make it difficult for people to buy things and can even slow job growth.
Per a Bankrate 2024 report, “Years of skyrocketing inflation may have significantly impacted people’s ability to pay for their living expenses and save, as a record-high percentage of Americans now say they have more in credit card debt than in emergency savings.”
Despite this
Bankrate also shares that people are working hard on their finances. “36% of U.S. adults are prioritizing both debt repayment and building emergency savings, as opposed to focusing on just one. That’s the highest percentage since 2018.”
Making the most of your savings
Once the bottom line is met, a person may continue to save and possibly invest and diversify some of their savings to grow their wealth. Experts suggest talking to a financial expert to weigh investment options with higher yields that won’t entirely tie up savings. They caution that when investing, it’s best to keep at least a minimum of one to two months’ worth of expenses in a readily available emergency fund for immediate liquidity.
We hope you found this article on how to establish an emergency savings fund helpful. Interested in reading more on finances? Click here to access the link to “Four finance tips for successful living.”
