Emergency Savings: What It Is & Why You Should Have One
Having access to instant cash is a necessity for everyone at some point in their lives. Recently, many Americans may have needed to access these liquid accounts to assist in managing the financial burdens associated with the COVID-19 global pandemic. Millions of people were displaced from their routines and left with no form of income due to massive lay-offs and furloughs. This is precisely why having some form of savings “stashed away” is vital to maintaining the structure of your financial home. We call this an emergency savings account.
What is an emergency savings account?
An emergency savings account is typically an account with a higher interest yield than a traditional savings account or something like a money market account. Both of these accounts are what we call liquid (easy access) assets that still allow you to get bang for your buck by offering higher compounding interest rate accrual.
Setting aside money into one of these accounts offers you the peace of mind that, when things in life go awry, you have built a stable foundation to prevent chaos from ensuing. You have granted yourself the capability to weather financial turmoil.
Keep in mind that this money is set aside solely for use during an emergency. Any savings you have for long-term goals like an engagement ring, purchasing a home, taking a vacation, or similar are savings accounts that you will want to keep separate from your emergency fund.
How much should I set aside?
The amount of money you set aside is dependent on many variables. Each situation is unique, and for an accurate description of your financial situation, you may want to set up a personal meeting with a professional.
Typically, the rule of thumb used is 3-6 months of your living expenses. This can take a while to achieve, be patient with yourself. Setting up a stable form of security does not happen overnight. The best way to start building an emergency savings fund is to contribute in consistent intervals and with manageable amounts. It could be as simple as depositing $50 every paycheck until you reach your goal. Aim for realistic goals at the beginning, like saving a total of $1,000.
By contributing $50 every couple of weeks, you will have reached your initial goal of $1,000 in about ten months! Once you get used to the habit of saving, you may find that you can increase your total contribution to help you achieve your long term goals more quickly.
Key things to consider when determining your expenses
Earlier in this article, we noted that an emergency savings fund, while it does carry a standard rule of thumb, differs for many individuals. When determining whether or not you need to save for three months, six months, or potentially even nine months of living expenses, you should consider what your employment situation is like and how much you have set aside in easily accessible accounts right now.
If you were to experience some form of separation of service, how long would it take you to find adequate employment at a similar income level? You may work in a highly competitive industry where opportunities are more difficult to come by. These factors would potentially increase the amount that you should be prepared to have set aside. If you are someone in a less competitive or growing field, opportunity may be abundant and you may not need to set aside as much in your savings. It is highly encouraged that you consider all factors when determining what is the best-case scenario for your situation.
Additionally, you may realize that you have extra money available that you can contribute to getting a head start on an emergency savings fund today. Depending on what that amount is, you may drastically reduce the amount of time you need to spend in a “savings” mentality.
- An emergency savings is vital to maintaining the stability of your financial house
- The general rule of thumb is 3-6 months of living expenses, but personal discretion is important
- Start small, stay consistent and plant the seeds that you will harvest when uncertainty strikes