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Have you ever been in an auto accident, had an unexpected medical expense, needed an unplanned home repair, or experienced the loss of a job? Many people have experienced unexpected financial expenses that left them unprepared to absorb the financial loss. This can cause a lot of financial stress. By setting up an emergency savings account in advance, you can rest easier knowing that your financial security will remain intact despite any financial emergencies that arise.
Keep reading to learn more about why having an emergency savings account is important, how to determine when to tap into your emergency savings, and how to start your new emergency savings account.
What Is an Emergency Savings Account?
An emergency savings account is a bank account where you stockpile funds to cover unexpected large financial expenses. Typically, the money is placed in a savings account that is specifically set up to only be used when there is an urgent need.
One of the easiest ways to end up in financial debt is to be forced to rely on high-interest credit cards or loans when you are caught off guard by a large unexpected financial expense. An emergency savings account acts as a financial safety net, allowing you to stay in control of your financial situation.
When Should You Use Funds From Your Emergency Savings Account?
Ideally, your emergency fund should only be used to cover financial emergencies. Some common examples of situations where you may want to tap into your emergency savings include:
- Large unplanned medical expenses
- Major car repairs
- Large unexpected home repairs
- Unexpected replacement of vital home appliances, such as a refrigerator or a furnace
- Sudden job loss and the need to pay monthly rent or make a mortgage payment
These are just a few of the needs that could come up. Potential uses for this fund include any financial emergency that threatens your financial stability. If you need a larger sum for entertainment or to purchase more costly items that are not necessary but desired, consider opening a separate account designated for this type of expenses.
How Much Should You Save for Your Emergency Fund?
This amount is going to vary from household to household. To determine how much money you need to store in your emergency savings account, you first need to know your monthly financial requirements. Start by creating a budget that includes your income, regular necessary expenses, and any optional expenses.
Once you know exactly where your money is going each month and how much money is needed every month to cover your needs, multiply your total monthly expenditures by the number of months you would like to save in your emergency fund. A good rule of thumb is to save enough money to cover expenses for at least three to six months If you have a family to support, you may want to save a little bit more money to cover your family’s expenses for at least eight months.
Tips for Building Your Emergency Fund
You may experience a bit of sticker shock when seeing in print the amount of money necessary to cover all your financial expenses for three to six months or more, but remember that this isn’t a race to the finish line. You will be able to build your emergency savings account up to the total recommended amount over time. It’s important to keep your eye on the prize and remember that saving consistently is the key to your financial success.
Set Attainable Savings GoalsIt’s important to set small, attainable savings goals each pay period. You shouldn’t feel too financially restricted or hopeless. If you set your incremental savings goal too high and don’t allow yourself any budget for happiness and enjoyment, you are setting yourself up for a savings failure. An unreachable target amount can be discouraging and cause you to give up on your plan.
So start with a dollar amount that allows you the freedom to enjoy your life and pay your expenses each month without strain. If your dollar amount for savings each month is not as high as you had hoped, review your monthly expenditures and see where you may be able to trim your spending in a way that is still livable. There are also a variety of savings strategies that can help you set aside the money you need.
Choose the Right Account TypeIt’s important to choose a savings account that keeps your money accessible within a day or two but not so accessible you are tempted to spend the money frivolously. It’s also best not to place your money in any sort of investment account due to the market risk associated with these account types. You don’t want to lose your savings to a market drop.
Look for a savings account that either has no annual fees or waives them when you meet certain criteria. Most savings accounts provide some earned interest to give your savings a financial boost with minimal effort, but before you sign up, make sure to check the rates.
Set Up Automatic DepositsAn easy way to consistently save money each month is to set up automatic deposits. You can even have a specified dollar amount from your paychecks deposited directly into your emergency savings account every pay period. Automatic deposits or transfers make it so you don’t need to remember to physically transfer the money each month. You also will be less tempted to spend the funds when they go right into your savings account. This can help create more consistent savings habits.
Setting aside emergency funds can help you maintain financial stability when you need it most. When you are ready to start your emergency savings account, open a savings account at Riverview Bank. Our client service team is ready to help you meet your financial goals.