Better Safe Than Sorry: The What, How, and Why of Saving Emergency Funds
“Expect the best, plan for the worst, and prepare to be surprised.”
This sage advice from famous motivational speaker and author Denis Waitley rings true in life, but is especially apt when it comes to our personal finances. Life should be lived with a glass-half-full perspective, but a solid financial plan will always account for unexpected contingencies.
Despite this understanding, only a small amount of Americans report being adequately prepared for financial emergencies. A survey conducted by Bankrate showed that 59% of Americans don’t have enough cash in their savings to cover a $500 or $1,000 unplanned expense, despite almost half of participants reporting that either they or a family member faced a major financial expense in the past year. This disconnect suggests that while people are aware of the real world consequences of not having an emergency fund, they are perhaps unsure of how to go about building this critical safety net.
If you already have an emergency savings fund, great! But whether you’re starting from scratch or growing that fund, this guide will help you work toward your end goal.
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What Is an Emergency Fund?
As the name implies, an emergency fund is a separate bank account in which you set aside money to cover any unexpected expenses or financial emergencies. When choosing an account for this purpose, keep in mind that accessibility is of primary importance. There’s no point in having a substantial emergency fund if you can’t access it when the unexpected arises, or have to pay significant penalties to do so—certificates of deposit are a great tool for growing your savings, but as they restrict access to funds until the maturity date of the investment in order to help you achieve the greatest ROI, they would not be appropriate for an emergency fund. As such, you want to make sure you choose a savings account that allows you easy access to funds, so a simple savings account with low or no fees and easy withdrawal options is a great choice.
How Much Should You Put In an Emergency Savings Fund?
In general, it is recommended that you put three to six months of living expenses in your emergency savings fund. This is because, in the event of sudden and unexpected job loss, your emergency fund should be able to tide you and your family over until you get a new job.
Hence, it is important that you have an accurate picture of your regular expenses. When calculating your monthly outgoings, consider obvious items such as utilities, rent, and groceries, but also transportation, memberships, and other miscellaneous but regular costs. It’s also better to overestimate rather than underestimate your expenses when it comes to determining how much to put into your emergency fund. After all, it’s better to be over-prepared than underprepared.
How Can You Fund Your Emergency Savings Account?
How you fund your savings account will of course vary from individual to individual, and we recognize that it will be a more difficult task for some. One way to begin funding your emergency savings fund is by putting away a set amount each month until it reaches a certain threshold. You can do this by setting up an automatic direct deposit into your designated savings account when your paycheck arrives, allowing you to save without even thinking about it—another reason it’s a good idea to know your average monthly expenses, as you need to know how much you can reasonably afford to contribute to your emergency fund. Even if it takes you a long time to reach your target cash cushion, a savings account of even $500 will get you out of many financial surprises, so every little bit truly counts.
The earlier you start including your emergency savings fund into your overall financial plan, the easier it will be to grow that cushion. If you’re still unsure how to fund an emergency savings account, Citadel can help. Schedule your free financial planning consultation today and we will personally work with you in setting up a financial plan for you.