An emergency fund isn’t just a savings account. It’s a sum you put aside for the explicit purpose of avoiding financial hardship should you encounter a scenario like car trouble, medical emergencies, or home repairs. But here’s the rub: experts estimate that over half of Americans have no emergency fund at all. This is a disaster waiting to happen for individuals and families who live on a tight budget, and are walking a financial tightrope. Unexpected expenses happen every day, and are mostly out of our control. So what can you do to avoid being set back?
Emergency Fund 101
First, we need to establish the parameters of what exactly constitutes an “emergency fund.” This account is never touched, under any circumstances, unless the situation is absolutely dire. Inappropriate uses of an emergency fund include:
- Vacations
- Large planned purchases (car, engagement ring, etc.)
- Investing
- Paying off previously accrued debt
- Paying bills
These represent regular, planned expenses that should be covered by your existing budget. You should try to avoid putting yourself in a situation where your regular savings are insufficient in covering these expenses in a tight scenario.
Find the Right Account:
While many banks don’t offer accounts specifically earmarked for “emergency funds,” there are a few types of accounts that work wonderfully if used for that purpose, and some that you should probably consider avoiding.
– Standard Savings
Using a standard savings account is a great way to keep your emergency fund safe. This is especially true if you are contributing to it regularly and the institution offers you interest on your deposit.
– Money Market Accounts
Money market accounts like Equity Bank’s Money Market Account can be a great option for building on your savings. These savings accounts work by investing your money intelligently, and offer great returns on large deposits.
– CDs
Certificates of Deposit (CDs) come with some appealing upsides, not least of which is the attractive interest rates, but they probably aren’t appropriate for emergency funds. Due to the unpredictability of emergencies, you may need to withdraw funds before the CD “matures,” resulting in you incurring a penalty that may offset any gains you’ve made or even biting into your initial deposit amount.
Automate Savings
One of the hardest aspects of any savings plan is actually putting the money away. Experts recommend saving around 10-20% of your total monthly income, and if you don’t have one yet, at least half of that should be dedicated to building an emergency fund. But when your paycheck hits, many of us jump to make purchases that have been sitting in online carts or catch our eye when out shopping.
The easiest way to avoid this impulse is to automate your deposits according to your predetermined budget. That way, when your paycheck comes, you never risk eating into your emergency fund contribution and you don’t have to rely on self-control to ensure you’re making the smart decision.
Equity Bank’s online banking tools make account management easy, and can even offer budgeting tools to help you decide on how to most effectively allocate your earnings.
Set Realistic Short-Term Goals
Setting realistic targets is one of the most important strategies for anyone wishing to increase their savings. Aiming high may seem appealing at first, but can lead to discouragement and eventual abandonment of your plans. Your emergency fund does not need to appear overnight; it can take months or even years to reach what experts consider the appropriate amount (approximately 3-6 months of total living expenses).
Each individual’s contribution to their emergency fund will vary, but there are a number of ways to keep yourself honest. The first is to abide by the 10-20% rule mentioned earlier. This is a no-nonsense strategy that leaves you quite a bit of leeway with regards to your nonessential expenditures. Another is by creating a sort of “checks-and-balances” system, where each of your nonessential purchases is matched by a contribution to your savings account. Effectively doubling the price of every item you purchase makes you much less likely to spend on a whim, and allows you to passively build on your savings beyond even your standard contribution.
An emergency fund should be a part of every American’s life, not only for your own sake, but for loved ones and family. Should you encounter a crisis, it is always better to have taken precautions ahead of time than to potentially face major financial setbacks due to no fault of your own.
For help getting started on your savings plan, contact us today, or visit your local branch to speak with an Equity Bank team member.