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We’re told by the famous radio hosts, internet personalities and the greatest minds in personal finance that we need have an emergency savings budget built up. Having an emergency savings is like being self-insured, as you’ll have a pile of money available to you for unforeseen situations. It can make an already stressful situation less stressful, as you shouldn’t have to worry as much about money.
What is emergency savings?
Let’s define emergency savings. The Consumer Financial Protection Bureau defines emergency savings as “a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies.” I’d rather attempt to be as prepared as possible for the unforeseen, but things happen. Life… uh… finds a way.
Emergency savings are for exactly that – emergencies. In this situation, an emergency is a lost job, a car repair or a home repair. Hopefully temporary situations, so that you utilize the savings as a safety measure to get you financially through things. For clarification, this emergency savings is not meant to be used on a future large bill, like your semi-annual car insurance bill. Emergency savings is not meant to be used on the latest phone or game console that you didn’t budget for ahead of time.
How to fund your emergency savings
In previous episodes, I’ve talked about making a budget. The best budget is useless, if you’re not living below your means and saving every extra dollar. Building the emergency savings may be a challenge, if you’re starting from zero and don’t have much room in your budget outside necessary spending. Consider getting a second job or finding a higher paying job to stash money away. I don’t mean to make finances sound simple, as I am fully aware money can be difficult for many people, but there are many different pathways to financial success. Start small and grow from there, even if you’re putting $5 away every month. If you’re financially able to contribute to retirement accounts and don’t have any emergency savings, consider pausing investments while you save. If you have plenty of room in your budget, also consider making it a new line item, so you’re always putting money away without thinking about it.
To start, set a goal of saving $1000. Then, set your next goal of saving one month’s worth of expenses or income, whichever you prefer. Setting realistic goals will eventually get you to your desired savings amount. It is usually recommended that you save three to six months’ worth of expenses, but your amount is up to you. Once you hit your savings goal, there’s no need to continue to add to it unless you feel like you need to make adjustments to your financial situation. My personal preference would be to save about one year’s worth of expenses.
Where to put your emergency savings
Keep your emergency savings away from your normal checking and savings account, so you’re not tempted to use it easily. This money is meant to be your safety net, and not meant to move around a lot, but you still want easy access to it whenever you may need. Keep the savings in an online high yield savings account or money market account. High yield savings accounts and money market accounts offer better interest rates than a traditional savings account. Money market accounts have a minimum balance that you need to keep, while a high yield savings doesn’t require a minimum balance. Both high yield savings and money market accounts allow you to access your money with a debit card, but limit your monthly transactions. I prefer to use use an online high yield savings for my emergency savings.
Why emergency savings is beneficial
Emergency savings is beneficial for a handful of reasons. It allows you to stay out of debt when an emergency arises. Your credit card limit is not your emergency fund. I’ll talk about credit cards in another episode, but there is a right and wrong way to use credit cards. Using a credit card for an emergency without having savings to pay it off can lead to additional financial stress. I also mentioned earlier that your emergency savings can make a stressful situation less stressful, since you won’t have to worry about finances.
Question of the episode:
Tell me your thoughts on emergency savings. How much do you put away? What kind of account to you keep it in? Have you had to use yours recently? How do you replenish it, if you have to use some? Please leave a comment down below.