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Emergency Savings – Is It For Me?

Sounds like a crazy question, right? But the fact that over 50% of Americans have less than $1,000 in their bank account gives it a bit more weight. If you are a part of the majority that has no emergency savings, it might make you feel better that you aren’t alone here, but please don’t let it make you complacent.

What happens when we don’t have emergency savings?

Every time we hit a bump in the road, we have to reach for credit cards to bail us out. And when you’re already in a position where you have to reach for a credit card to put out a fire, the last thing you need is an additional monthly credit card payment, especially one that grows with compound interest. Clearly, you can see the spiral here.

Admittedly, saving hard earned cash to disappear problems isn’t as sexy as getting that new shiny thing, but the alternatives are worse. When you have cash backing you up, you have more options available to you when you’re in trouble, so you won’t have to sell a piece of your future to solve a problem. Think of cash as the hammer in your financial toolbox. You need it. We all do.

Related content: Are You Losing Money By Saving?

Pros
  • Builds good money habits.
  • Gives you security and confidence.
  • Allows you more choices when problem-solving.
  • Savings accounts aren’t subject to the risk that investments are.
Cons
  • Savings accounts generally earn a lower return than investments.
  • Monthly fees at some banks can eat up interest earned.
  • Saving money could mean a change in lifestyle.
  • Budgeting to save forces you to take a deep look at how you handle money.

How much should I save?

Ask yourself how much you would need each month to survive if your income stopped abruptly. Ask yourself uncomfortable questions such as “how long would it take me to replace my job?” The more difficult you think it might be for you to replace your income, the more you should save. Financial advisors suggest ranges anywhere from 3 month’s to 2 year’s worth of monthly expenses. But you are the best judge of your risk tolerance. 

Where should I keep my emergency savings?

The most important features of an emergency savings account are accessibility and growth. You want to be able to use the money immediately should you have to, but you also want to keep it in an account with the highest interest rate possible, and no monthly fees. It’s a good idea to keep an emergency savings account in a different bank than where you do your everyday banking to avoid the temptation of dipping into it. Online savings accounts can come into play well here as their interest rates are generally higher, and some have zero fees.

How do I start?

You may not be in a position to put very much aside at first, but don’t let this dissuade you from saving at all. The truth is, if you simply start by setting reachable goals, you will gain the confidence you need to continue. For example, set an initial savings goal of $1,000. Reach it. Then repeat it. Decide on a fixed amount that you can spare each month. Can you afford $50 bucks? $250? Pay yourself first via direct deposit or scheduled transfer. Treat your emergency savings like a monthly bill, and pay it first. Here are a few of the highest interest rate, no monthly fee savings accounts that allow you to automate your savings.

Online Savings

Min Balance

Fees

Interest

Ally

0$

0$

%1.25

Discover

0$

0$

%1.30

Alliant

5$

0$

%1.25

So, let’s put this in play here. Say you can save $100 per month. (That’s like $3.50 a day, you can do that, right?) With an interest rate of 1.30%, you’d have $1,000 in around 9 months. While that might not seem like much, if you put this in place today and forget about it, 3 years down the road you’ll have close to a $4,000 cushion to fall back on should something happen. $4,000 can at least buy you some time, or car repairs, and keep you from sinking into debt. So, just socking away $3.50 a day for 9 months can put you in a better financial position than most Americans. Think about that for a minute.

Related: What’s Keeping You From An Online Bank?


Photo by Steinar Engeland

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