How to Start an Emergency Savings Fund
Unlike a usual savings account, which you use to put savings towards a specific goal, an emergency savings fund exists to provide a financial cushion for unexpected circumstances that leave you without a steady income. Ideally, the account will keep you financially afloat for three months. That may seem like a lot of money to keep in your bank account, but remember that in an emergency you’ll be happy for any amount of money saved because it will buy you time to find a long-term solution.
Calculate the ideal saving rate
Your first step should be to calculate the ideal amount to save (be sure to use our savings account calculator to help you get an accurate estimate). In this case, that means enough to maintain a simplified version of your lifestyle. Add up a month’s worth of daily necessities, such as rent or mortgage payments, bills, groceries, and car payments. Exclude expenses you can do without in the case of an emergency, such as new clothes, going out to eat, and other simple luxuries. Once you’ve calculated this number, multiply it by the number of months for which you’d like to plan.
Remember that this is your ideal and shouldn’t stop you from starting your fund at a saving rate with an easier mark to hit. The stash can be used for smaller financial emergencies, such as an unexpected car repair, medical procedure, or travel to attend to a serious family matter, but remember that the intent is to keep this money stored as an asset at all times and replace it as soon as possible if a financial emergency drains it.
Choose a savings account
When choosing a place to stash your savings, consider a place where you’re less likely to dip into the money for other expenses. Here are some ideas for where to stash your funds:
- Separate savings account:
- The benefit of this option is that your money is safe and routine deposits are simple. The only difficulty many face in opening a savings account is not touching the money once it starts to grow. If you feel that this won’t be a strain on your willpower, then definitely consider opening a separate savings account. Be sure to compare different savings options available to find the best bank to open a savings account for you.
- Certificate of deposit (CD)
- This is a great way to let your savings grow. Banks pay interest on these accounts for the term period, so try to find one with a high interest rate and leave it alone until it matures. Standard term periods range between six months and 10 years and usually a longer term length means a higher interest rate. Early withdrawal fees can be high, so avoid withdrawing the money before the maturity date to maximize your saving account benefits.
- Safe deposit box
- These can provide the separation you need to keep from touching the money, but may be best as a short term savings option since the cash won’t accrue interest while it’s stashed away. These storage spaces can only be opened with the renter’s assigned key, the security guard’s key, and the correct signature. You can rent one for a fee at a nearby banking center. Be careful not to lose your key; fees to drill open the safe deposit box are often expensive.
- In-home safe
- This is another option if you’d like to avoid fees and making routine trips to the bank. However, these safes are often expensive and must be drilled into the floorboards to prevent theft.
Start your savings program with these money saving tips
Next look at your spending habits and find small ways to set aside money. One of the benefits of this kind of savings account is that since you’re planning for a day that will hopefully never arrive there is no set time frame by which you need to have your savings in hand. Below we’ve listed some suggestions to help you decide what works best for you:
- For every unnecessary purchase you make add half the cash value of that purchase to your savings account. Not only will this help your savings grow, it will also make sure that you’re thinking about spending with savings in mind.
- Keep your routine savings goals small. If you decide to make a routine investment in this account, keep the amount small and manageable, such as transferring $10 a week into your savings account (which will help you save just over $500 a year).
- Save your change. Most people hate dealing with loose change, but instead of losing it to the couch cushions, hold onto it. If you invest in a change saver and some coin sleeves, you can easily separate your coins and deposit them at the bank.
- Add money that you’ve already considered spending on other things. This can be as simple as selecting a cheaper menu option at a restaurant instead of your pricier first choice and adding the difference between the two to your savings fund, or taking public transportation instead of a cab and adding the would-be fare to your fund. It can also apply to larger purchases such as new clothes, expensive nights out, and elaborate gifts.
- If you receive any unexpected income such as a high tax return or cash gifts for birthdays or holidays, set aside at least a portion of this for your fund. Since the money was unexpected, you’ll have the flexibility to stash it instead of spending it on necessities.
Get creative when deciding how to save. You know your spending habits better than anyone and which tricks work best for your budget. For more information on savings accounts, certificates of deposit, or any other savings-related products, give us a call or stop by a local branch to speak with a dedicated member of our team.