WHETHER you live alone or with dependents, financial experts advise everyone to boost their savings to have money on hand in case of an emergency.
These emergency funds can help you stay afloat in the event of job loss, injury, or unexpected expenses.
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Saving is easier said than done – only 53% of Americans can handle an unexpected $500 expense without stress, according to a survey by pension provider, Empower.
Why do you need an emergency fund
Saving money with worst-case scenarios might not be an exciting idea, but it’s essential for good financial health.
Sources of income can dry up quickly and unexpectedly, even due to circumstances completely beyond your control.
Without emergency savings, a large expense or sudden loss of income can become an uphill battle to pay bills and cover costs that are usually factored into your budget.
Falling behind on these bills can result in additional fees and charges, further complicating the situation if you run out of savings.
You can withdraw money from investment or retirement funds if you have assets there, but you will face tax issues and withdrawal penalties.
How much should you save
If you ask 10 financial advisors how much you should have in your emergency savings, you might hear 10 different answers.
Some recommend having enough savings to cover one year’s expenses, while others suggest having enough savings for three months or a fixed total instead of a relative amount.
While there’s no one size emergency fund, $1,000 is a great benchmark if you’re just starting to save.
Not only is this a more achievable goal for the average American than planning against months of cost, but it provides a significant buffer to manage an unexpected one-time cost without compromising your ability to make ends meet.
How to build your emergency fund
Whether you’re starting your fund from scratch or you’re an experienced saver, you should start any assessment of your savings by doing a thorough analysis of your budget with savings in mind.
The amount you’ll need to save is tied to what you or your family spend in a given month, and breaking down your budget purchase by purchase can help you identify areas to save right away.
Once you have an idea of your spending and savings goals, it’s a good idea to create an account for your emergency savings.
Some experts recommend having a separate account from your general savings for your emergency fund, but you should still use a high-yield savings account.
Compared to typical savings accounts, which offer an average of 0.06% interest, high yield accounts can earn upwards of 0.4%.
Combined with low minimum deposits and no withdrawal penalties, the relatively high interest rates of high-yield accounts make them the best option for your emergency fund.
Money market accounts may offer higher interest rates with similar ease of withdrawal, but many have high initial deposit requirements.
It’s a great idea to start your fund with a lump sum if you can afford to set aside a few hundred dollars, but setting aside small amounts of money each month for a savings account is a solid strategy. and durable nonetheless.
For additional tips on how to build your emergency savings, finance whiz Suze Orman and Dave Ramsey shared some of their favorite tips.
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