April 20, 2021
If you have never budgeted for saving before, it can be daunting to figure out how to line item this into your finances. How much should you save each month? Do you set savings goals? What if you can’t afford to save a lot? A great first goal is to save an emergency fund.
The Emergency Fund
An emergency fund is money set for any immediate needs that may come up outside of your normal budget. If you don’t have one in place, you’ll likely abandon your financial plan putting out the inevitable fire. A good goal to start with is having $5,000 in this account, with an ultimate goal of three to six months of fixed expenses.
If an urgent need comes up during this savings period, don’t stress about skipping a contribution, but get back to your game plan as soon as possible.
Having an emergency fund is a way to steward your money wisely in that it helps you avoid taking out loans or resorting to other less than ideal measures during tough times.
What kind of account should I put my emergency fund in?
There are a few different types of accounts you can consider. It is important to put this money in a different place other than your checking account, but also in a place that is easily accessible.
An easy option is to link a traditional savings account to your checking account. Look into savings accounts that earn interest, as a bonus, and make sure they are ultimately free to use. Accessibility can have its pitfalls, though, as you may be tempted to pull from it when it is not a true emergency.
A high-interest savings account, with the best rates usually found online, is another option. It is slightly less accessible than a traditional bank account and can be a good choice both to earn more interest on your savings and also to reduce the risk of using it unnecessarily. In order to withdraw money, you have to transfer money to an account you hold with a brick-and-mortar bank.
These are probably the most conservative options. Other possibilities include money-market accounts or Certificates of Deposit (CDs) but these tend to have more time-restrictions on when you can use your money, penalties for withdrawing early, or take longer to remove funds from. Depending on your situation, they can offer benefits, as well, usually meaning higher interest rates for your money.
Growing your emergency fund
Once you are well on your way to an emergency fund goal, you can begin to think about longer term goals, such as saving the amount equal to three to six months of your current lifestyle expenses.
If you were to lose your job or source of income, how much would you need to get by until you found another position? Tally your monthly expenses (focus on your basic bills first) and multiply that by three for salaried positions, or six, which is recommended for freelancing careers or business owners.
The goal is to save enough to pay your mortgage or rent, car notes and insurance, utilities, groceries, and your cell phone bill. Most other expenses could be considered a bonus!
A Safety Net
Having an emergency fund provides a measure of security that if the unexpected happens, you are not financially stranded. And planning ahead is basically planning for these unexpected moments that, at some point, we all experience. This is a great place to start in your savings journey.
Some of you have no problem understanding building up your emergency fund. In fact, it’s possible you have TOO much cash saved up. Beyond the six months worth of expenses, we encourage you to put your money to work towards your financial plan to reach your goals sooner.
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