What Is An Emergency Savings?
An emergency savings is an account that is essentially set aside for a disaster. This could be a loss of income, a large unexpected expense or a medical emergency. It is money that is set aside to deal with a major unexpected event, which can happen more than you might think.
Your emergency savings account should contain enough money to handle at least 6 months of your monthly expenses. This is enough money to get you through the typical emergency.
Tips For Starting An Emergency Savings
The hardest part about starting an emergency savings is the initial deposit. Once you get it going, saving can become addictive and it is fun to see it grow. If you want to make the most of this new account, here are some tips for you.
1) Open A New Savings
You might already have a small savings account at your local bank that is tied to your checking. This is great to keep a few dollars in, but you need your emergency savings to be at another bank entirely, preferably in an online savings account.
You want it separate because you want it to stand apart from your monthly spend. If it is attached to your checking account, it is too easily borrowed from. An online account is still accessible, but transactions would not be instant, it would take 1 to 2 business days to transfer. That gives you the time that you need to reconsider the transfer and avoid bad decisions.
Another benefit of the online account is that it will generally earn more interest. An online savings account like Marcus from Goldman Sachs will pay 10 to 20 times what your local bank pays in interest. It is still not a huge amount of money, but earning 1.5 percent interest is far better than earning .1 percent interest.
2) Use A Windfall To Start Up An Account
If you suddenly come into a large amount of money, use it to kick off your savings account. Suddenly having a large amount of money in savings can help you get into the saving spirit. Once you know that it is there, it is reassuring to know that you can handle things in an emergency.
Windfall money is any money that you were not expecting and that you were not counting on to live. It could be from a tax refund or perhaps it was your Covid-19 stimulus check. If you do not need it to live on, put it into savings, otherwise, if you and your spouse received 2400 dollars, put it in your new online account.
3) Budget To Save
Your saving should be part of your regular budget. Ideally, at least 10 percent of your take home pay should be going to your emergency savings. So, if you take home 4000 dollars, you should be depositing 400 dollars in savings.
If you can not currently swing 10 percent, do as much as you can for now. Then look for ways to cut your other expenses so that you can in crease your savings. Eliminate cable, switch internet companies or negotiate with your insurance agent for a better rate.
4) Automate Your Savings
Take advantage of free banking tools like automatic transfers. Set up an automatic transfer from your checking to your online savings account for the day that you get paid. If you automate things, that money is far more likely to make it there.
Automation also helps because that transfer will probably happen before you see your checking account balance. You can not miss what you never see.
5) Keep Your Lifestyle Consistent
You ever wonder why you seem to make more money year after year but still never seem to have anything extra? This is because of lifestyle creep and it sneaks up on you.
You start earning more money and you start treating yourself a little more. It could be going out to eat more often or it could be buying a car that is a little bit more expensive.
Instead of falling victim to this trap, make it a point to keep your lifestyle consistent. Then, when you start making more money, funnel that extra cash into your savings account.
6) Bank On Frugal Decisions
Your savings account will usually allow you to make virtually limitless deposits, no matter how small. Use this to build your savings with smart money decisions.
If you usually go out to eat on Friday night, cook a meal at home. Take the 40 dollars that you might save and deposit it into your savings account. Like to go to the movies on Sunday, hit the dollar theater instead. Then send that 10 dollars saved to your online savings.
At the end of the month, take a look and see how much your savings has grown from all of these little smart decisions. You might be surprised.
7) Set A Goal
It is nice to have something to work towards. It gives you motivation and direction.
For your emergency savings, figure out what 6 months worth of expenses is. Do you need 20000 dollars? If so, set this as your ultimate goal with some smaller goals in between. Reward yourself once you have 1 month worth of expenses, then 2 and then 3.
Once you have reached 6 months of expenses, you can give yourself a firm pat on the back but do not pump the brakes. Keep saving money but now, divert the money into a long term savings investment account like an IRA.