Every financial plan should include an emergency savings fund. An emergency savings fund is money that is saved for unplanned expenses, such as medical bills, home and car repairs, or an unexpected loss of income. Emergency funds allow you to cover these costs without having to turn to a high-interest credit card or a loan. No one likes to think about unforeseen circumstances, such as a loss of income or a stay at the hospital. However, an emergency fund must be a part of your financial plan, as it may not only prevent you from falling into debt, but it can also provide peace of mind.
According to a 2020 Bankrate survey, only 4 in 10 Americans have enough savings to cover an unplanned expense of $1,000. Twenty-one percent of Americans say they have no emergency savings, while 27% of Americans say they have some emergency savings, but less than three months’ worth of possible salary or possible three months’ worth of expenses.
The best place to start your emergency savings fund is in a high-yield savings account. This type of account can pay 20 to 25 times more than a standard savings account. Depending on your bank, you can hold both your savings account and checking account at the same institution, making transfers simple and fast. Nowadays, you can also open a high-yield savings account with an online bank, which often pays a higher rate.
A CERTIFIED FINANCIAL PLANNER™ professional can assist you in developing practical strategies to establish an emergency fund and to stay on track with your financial goals. Here are three strategies to consider:
- Keep Track of Your Monthly Budget
Look at your monthly income and determine all your essential monthly expenditures, such as housing, groceries, utilities, car payments, etc.
- Create Your Goal and Stick to It
As a rule, an emergency savings fund should have three to six months’ worth of fixed expenses. Don’t feel intimidated by that number. Instead, look at your budget and decide how much money needs to be in your emergency fund and how much you can afford to allocate each month. If you are not saving enough to meet your monthly goal, try to find some expenses that you can cut back on or revise your goal. Keep in mind that this will take time. You will not build your emergency savings fund overnight.
- Set Up a Direct Deposit
Set up automatic monthly deposits to a bank or credit union savings account or money-market fund. This is a useful tool because you won’t have to worry about missing payments. An emergency savings account is a foundational step to help improve your chances of success. The skills you develop, and the life lessons learned along the way, will be just as important as the emergency reserve account itself.
Lastly, understand that circumstances change, and thus so should your goals. If you receive a raise at work or any unexpected income, look at your budget. You may find that you can achieve your goal quicker or need to revise it altogether if the increased income alters your lifestyle.
A CFP® professional can help you set up an emergency savings fund and help you create a holistic plan to set you on the path to financial success.