Why You Need An Emergency Savings
Your emergency savings account can be a life saver. It can protect you from all sorts of financial disasters and add to the quality of your life. Don’t believe us? Here are a few things that an emergency savings can do for you.
Protect From A Loss Of Income
You might think that you have a stable job or career, but you just never know. Gone are the days when companies respect their loyal employees. It used to be that if you worked for a company for 10 or 20 years, you could start feeling some sense of job security. Those times are gone and now, you can be downsized out of a job at any time.
An emergency savings can save you from the financial nightmare of a total loss of income. When properly stocked, your emergency savings should have enough money in it to cover at least 6 months worth of expenses. That should give you plenty of time to find a new job and get back on your feet.
Cover An Unexpected Expense
Life likes to throw curve-balls at you and you never know when they are going to come. What would happen if your home air conditioner decided to break or the transmission in your car suddenly went out? You could wind up with an unexpected expense that could cost you a thousand dollars or more.
That emergency savings will let you pay cash for these expenses. This will allow you to handle the problem without the need to put your expense on plastic, racking up debt.
Stabilize An Unstable Income
Do you work in a sales or seasonal position? If so, your income likely fluctuates and this fluctuation can be quite dramatic depending on your occupation.
To even out this fluctuation, you should start an emergency savings. In slow times, you can pull extra money from the account in order to meet your monthly obligations. When times are good, add money to your savings so that it will be there when your income drops again.
Pay For Medical Bills
You might feel pretty secure if you have medical insurance, but your insurance does not cover everything. You still have to pay your copay and deductibles and these can be hefty, especially if you find yourself in the ER. Even with insurance, a sudden medical emergency could cost you thousands of dollars.
Without an emergency savings, you would have to put these bills on credit cards or, worse yet, let them go to collections.
Provide Mental Comfort
We stress about money, in particular about not having money. When you are living paycheck to paycheck, you know that all it would take is one little emergency to sink you. One little blip on the radar and you could be in big trouble and you know it.
A well stocked emergency savings can give you peace of mind. Wouldn’t it be nice to know that you can ride out just about any financial storm?
Build Wealth & Security
An emergency savings can help you build wealth in a number of ways.
One way is that it prevents you from accumulating high interest debt. Without a way to pay for emergencies, most people who need money will charge their way out of trouble. The average credit card has an interest rate approaching 20 percent, making this difficult debt to pay off.
Another way it helps you build wealth is by teaching you to save money. Saving 6 months worth of expenses is just the beginning. Once you have learned how to save, you can then divert that emergency savings money into an investment account and watch it grow.
Starting Your Emergency Savings
Obviously, an emergency savings is a very powerful financial tool. It can prevent a lot of problems and add stability to your financial life. So, what is the best way to start an account? Here are some tips.
Open An Online Savings
We are big fans of online savings accounts for a number of reasons. If you just look at the account specs, one thing jumps out at you right away. Higher interest. Online accounts often pay more than 10 times more than what a local bank will pay. While this is still only around 1 percent interest, why should you leave any money on the table?
Interest is not the biggest benefit to an online savings account however. The hidden benefit is diminished availability. There are no instant transfers with an online savings account. In most cases, it takes a full business day to transfer money from your online savings to your regular checking account. While this might at first sound like a negative, it is actually a very big plus.
One day is fast enough to deal with an emergency, but it is slow enough to give you time to think. That means that it should help to prevent impulse buys. Impulse buys that could quickly deplete a savings account.
If you have to manually deposit money into your savings, you are probably not going to do it. You need to automate everything so that it just happens, no excuses.
The absolute best way to do this is through your payroll department. If they allow you to split your check among several accounts, this is the way to go. When you do that, you never even see the money and you can not miss what you can not see.
Next best is to simply set up automatic transfers from your checking account to your online savings. Make the transfer happen the same morning that you get paid. You will still see the money, but at least it will be gone in a hurry.
Escalate Your Savings
Ideally, you should be saving about 20 percent of your take home pay. This is how you build wealth.
20 percent can be a hard pill to swallow for most people though, so start out slow. The important thing is that you get into the habit of saving money. Even $100 a check will add up to over $2500 in the course of a year, assuming you get paid bi-weekly.
Once you get used to saving a little money, gradually increase the amount. Work on your budget and find ways to cut expenses. When you do, increase your savings contribution. Also, avoid lifestyle creep. When you get a raise and start making more, save more. Eventually, you will be saving 20 percent of your income and you can start building a strong financial future.