Why Everyone Needs an Emergency Fund
Based on a survey conducted by GOBankingRates, 62% of Americans have no emergency savings and 20% don’t even have a savings account. Of those millennials aged 18-34 surveyed, 29% ranked with the majority stating they had nothing in savings.
If you had an emergency tomorrow and needed $1,000 what would you do? Could you afford it, or would you surrender to credit for the expense? Although many people view credit as a backup for times like these, it is not smart for your financial health. Rather, you should have a separate emergency savings fund tucked away for unexpected, unfortunate scenarios.
You probably understand why an emergency fund is important, but what about how and where to create one? You have to start somewhere—a great goal is at least one month net income. Singles and families with one income should build up to six months thereafter. For households with two similar contributing incomes, three months should be adequate. Have this baseline cushion established before you consider paying down debt.
Many young adults living independently, yet are just starting off in the workforce are shocked to learn they should be saving sizeable amounts of money. Remember, creating an emergency fund doesn’t have to be a one-and-done deal, but you must prioritize your goals so the emergency fund receives substantial attention. Depending on your regular expenses and comfort level, you can gradually build this account—whether it’s $25 or $500 per month.
Assessing the options
So, now that you have an idea of how much to save, where do you put your money? With so many savings options like money market accounts, high yield accounts and FDIC-insured online banks, it’s hard to decide where to put your cash. As long as the account is low-risk, accessible and liquid, it’s probably a good choice. You want to be able to deposit money easily and withdrawal it quickly. Luckily, there are many savings products available so you can weigh the pros and cons.
Types of savings accounts
Basic savings—These accounts require a very low opening deposit and minimal balanced required. Interest is typically low, but money is very accessible and oftentimes linked to checking, so deposits are easy. Basic savings accounts are a great place to start. Interested in becoming a member and want to start saving for the unexpected? Check out our share savings account. Credit unions offer good rates and you get to enjoy the perks of being a member.
High-yield savings —These include money market and other high interest types of accounts. However, to qualify you need to pay a larger opening fee and maintain a heftier balance. If you’ve already been putting money away for a while this might be a good place to transition money and start earning more interest. Keep in mind, access may be limited if not synced with your checking account.
Online savings—Online options offer fairly decent rates with little to no minimum balance required. However, accessibility can be an issue with some transfers taking longer to be posted. Carefully read the terms as there may be limits to the amount of transactions per cycle. Also, security can be an issue if the online bank is not FDIC-insured.
Tips to build your emergency fund
- Utilize automatic withdrawal from checking to savings so you don’t have to think about it.
- Change your direct deposit so that a portion goes straight to savings.
- View savings just like any other expense in your budget, and factor it in every month.
- Check out banking products that automatically put a percentage of debit purchases into your savings account.
Financial security leads to financial independence
If you haven’t already started saving for the unexpected, now is the time to start. Establishing an emergency fund will allow you to handle most of life’s circumstances without depleting your other sources of money, hindering financial goals or sinking you into debt. To learn about the best tools to help you build financial security, contact RiverTrace today at (804) 266-2767.