The COVID-19 pandemic served as a clear sign of warning for many investors, showing that unexpected disasters can occur without warning. Many found out the tough way this year that a sound financial cushion can be a lifesaver.
At the beginning of 2020, when people began to experience unemployment and let go from their jobs, a lot of individuals found themselves struggling to pay for basic necessities such as car payments and grocery bills. Instead, they had to hold out until they received money through government relief payments. And for many, those checks were not enough.
The pandemic has demonstrated the potential hazards of lacking an emergency fund. A survey showed that only 41% of people in America possess enough funds in savings to take care of an unexpected expense of $1,000, a statistic which was determined before the current pandemic.
Having a safety fund that can cover your costs for at least a month is a prudent way to prepare for any unexpected financial issues that may arise.
What is an Emergency Fund?
Cash kept in a separate bank account for unanticipated outlays, for instance medical expenditures, vehicle maintenance or home repair, is an emergency fund. A reserve of money kept aside can also assist you in dealing with a decrease in income from losing a job or suffering from a prolonged sickness.
Monies set aside for unanticipated expenses can minimize the demand and the fees involved in borrowing from high-interest credit cards or individual loans to finance them.
Emergency Fund statistics
Bankrate recently surveyed Americans regarding the state of their emergency savings, and found:
- More than half (51 percent) of people have less than three months’ worth of savings in an emergency fund.
- If hit with an unplanned $1,000 expense, 44 percent of people would pay it with their savings, compared with 20 percent who would pay with a credit card, 15 percent who would pay it but have to cut other spending, 10 percent who would borrow from family or friends, and 4 percent who would take a personal loan.
- Half of people feel very or somewhat comfortable with their emergency savings, while 48 percent are somewhat or very uncomfortable.
- More than one-third of Americans (34 percent) have less in their emergency fund now than they did before the pandemic, while 17 percent report having more now.
- More than half of millennials (57 percent) have no emergency savings or couldn’t cover three months’ worth of expenses, compared with 44 percent of Gen Xers and 49 percent of baby boomers.
- On the other hand, 19 percent of millennials, 29 percent of Gen Xers and 30 percent of baby boomers have enough emergency savings to cover at least six months’ of expenses.
- Women are less equipped than men to handle emergency expenses, with 57 percent unable to cover more than three months’ worth of expenses, compared with 44 percent of men.
- Meanwhile, more than a quarter of men (27 percent) can handle half a year’s worth of expenses, compared to just 23 percent of women.
Why an Emergency Fund is so important?
Having an emergency fund is a fundamental element of having a secure financial plan. It can assist you in covering unforeseen costs and prevent the accrual of additional debt from high-interest credit cards or loans. Having an emergency fund can give one assurance by making sure they have money when an unexpected expense occurs.
How much to save in your Emergency Fund
It is important to aim to save enough to cover 3-6 months’ worth of expenses for an emergency fund, however it may take some time to build up this amount. Start small with your goals, like setting aside $5 a day. Gradually build a savings account to cover a period of several months of expenses.
What you save will be reliant on what you make and what you spend. Put your emphasis on having enough money to pay bills, not on seeking a new income source. Monthly costs generally include rent or mortgage payments, utility bills, transportation costs, groceries, and any debt obligations.
How To Start An Emergency Fund
Having an emergency savings is an extremely important fiscal determination to be made in life, grouped with making a budget and looking towards retirement.
1. Set a Budget
Begin by making a budget to determine how much money is coming in and out each month. A budget can provide direction on how much money to put towards different aspects of one’s finances, serving as a plan of action.
For instance, suppose your average monthly earnings are $3,000. One thousand two hundred dollars could be put toward rent, six hundred dollars for groceries, and one hundred fifty for utilities. Additionally, one hundred dollars could be used for payments for student loans or credit cards. This leaves you with an extra $900 to use however you want – spend it, save it, or invest it. You could take some of that money to start your emergency savings.
2. Open an Emergency Account
Once you have an idea of the amount of money that you can set aside to save, the next step is to establish a distinct bank account specifically intended for saving up in case of unexpected expenses. By setting up a different bank account, you will be able to keep your emergency fund undisturbed and use it when it is necessary.
3. Invest for Growth
Apart from saving your money on a short-term basis, you should also consider investing for future profit. The rationale behind this is straightforward: Saving up money now means less admin in your senior years.
Youthful stockholders should contribute finances into retirement accounts such as individual retirement accounts (IRAs), Roth IRAs, and 401ks that are assembled for long-term use. Considering having a Health Savings Account (HSA) should be looked into if you qualify.
As well as providing tax advantages, these investment portfolios may compound over time, enabling you to have significantly more once you retire. You can use your HSA money to invest in the stock market for potential profits.
4. Use An Emergency Fund Calculator
You should now determine the amount of money that should be saved in accordance with the plan you have created. Examine the Millennial Money Emergency Fund Calculator to find out how much is suitable for you.
Why You Need An Emergency Fund
Cover Basic Expenses
In short, an emergency fund should be put in place in case of loss of wages for a while or any unforeseen circumstances (for example, if you injure yourself).
An emergency fund can be used to support a restricted spending plan for essential items such as food, accommodation, utilities, and fuel. One can also employ it to cover medical expenses or any other incidental costs.
It would be beneficial to associate your emergency savings with a checking account or set up a money market account so you can easily withdraw money using a debit card.
You should aim to have at least six months’ worth of expenses set aside as a backup in your emergency fund. Everyone should aim to have a savings target.
Avoid Financial Setbacks
An emergency fund can be a beneficial asset in keeping your financial plans on target, even in times of difficulty. By saving ahead of time, you can keep yourself from having to sell possessions or investments to make it during a tough period. It can also help you avoid accruing unnecessary credit card debt.
It is essential to be mindful that a financial crisis can rapidly become more extreme if caution is not taken. Create a reserve fund to act as a buffer against unexpected events. Coming out of the crisis without damage.
Pay Health Bills
An emergency fund can also be utilized to cover unforeseen medical costs. Consumers often find themselves in financial difficulty because of bills associated with medical care.
Hospitalization, transport by ambulance, and treatments such as drugs or therapy can amount to very large expenses if you don’t have a plan for it. It is thought that somewhere between 25% and 50% of all bankruptcy filings are caused by high medical expenses.
If you save money beforehand, you will be in a more advantageous situation to cover the cost for treatment when it is necessary.
Where to keep your emergency fund
The ideal location for storing your money for a rainy day is in a high-interest savings account, which can be accessed quickly and provides a lucrative interest rate. Search for financial institutions that are guaranteed to protect deposits through the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
Internet-only banking is a smart choice for a reserve fund because they generally provide higher returns and require lower charges than traditional banks. Expenses can reduce the amount of money in your emergency fund, so it is important to compare the interest rates and features of different accounts.
It is not necessary to stay with a certain account simply because you’ve had it for a long period of time. According to the survey, people usually keep their savings accounts for approximately 17 years, however if the one they currently have has a low APY or monthly fees, then it’s a smart move to look for another one that offers better terms, even if it means putting in a bit of effort.
Tips For Building An Emergency Fund
Maintain Flexibility
An High Yield Savings Account can come with the drawback of interest rates changing due to the way the economy is performing. It can be attractive to invest in a CD in order to lock in a higher rate of return for a specific period.
Storing your emergency savings in a CD may be a hazard since it can tie up your capital for a number of months or years, making it difficult for you to get your hands on the money without incurring a penalty if you are ever in an urgent situation.
Avoid Tapping into Savings
Maintaining an emergency fund can require lots of discipline. Having too much money in one’s possession can cause one to be susceptible to careless spending, since they have a large amount of cash available which could cover costs for an extended period of time.
Tapping into savings is a slippery slope. Beginning with small contributions of $20 or $50 apiece could add up quickly, decreasing your well-earned assets and leaving you with insufficient funds to face unexpected costs.
If you need help establishing an emergency fund, you could use any income tax refund or birthday money to help get it started. You may not find it the most exciting way to use your funds. It would be beneficial to yourself if you were to put some money away in case of an unexpected expense.
Continue to Fund the Account
Consumers can inadvertently create problems for themselves when attempting to build an emergency savings fund, as they may not keep up with regularly depositing money into the account. Rather than continuing beyond a certain bar, they choose to conclude their efforts as if it is complete.
This strategy is not reliable because your habits and way of life can alter as time goes by. For instance, you could receive a salary increase, purchase a home, or begin a family. Out of nowhere, the money you have saved up, 10,000 dollars, will appear to be significantly less.
Direct deposit should be used consistently and automatically to deposit funds into the account, with the amount deposited adjusted to fit in with your lifestyle. When you get to a particular level of money, put it in a more prosperous or more secure place such as a Certificate of Deposit or an index fund. In such a manner, your emergency fund will remain capable of accommodating your necessities as they alter through the years.
When should you use Emergency Funds?
Emergency funds should only be employed in the case of a critical problem, such as being out of work and not qualifying for jobless benefits or having an ailment without medical coverage.
It is suggested that you make use of emergency funds before depending on credit cards or cashing out investments such as saving bonds, stocks, and mutual funds. These should only be employed as a final resort in a financial crisis.
The Bottom Line
Life is unpredictable. You may eventually come across a circumstance in which you can’t earn an income for whatever reason. You might encounter an unexpected cost that you didn’t plan for.
Putting together an emergency fund and linking it to your bank can give you peace of mind that if something unpredictable happens, you have a financial cushion to use in case of sudden costs.
Remember: It’s vital to share with your future self. It can be difficult to plan ahead for a potential emergency. By taking the proper steps, you will be better able to handle a difficult scenario if it arises.
In the long run, prudent planning is the key to achieving financial security. Creating an emergency fund will benefit you in the long-term. Once you have taken care of your fund, begin thinking about other ways to put your money to work for you.
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