With the coronavirus pandemic still causing financial harm to many Americans, nearly 25% have no emergency savings to help them weather a loss of income or other financial issue. Now more than ever, COVID-19 has emphasized the need for robust savings. So, what is an emergency fund? It’s simply a separate savings account with funds in reserve for unexpected expenses and loss of income. In this article, we’ll offer tips for starting and growing your emergency fund so you can be prepared for whatever comes next.
How much should you have in an emergency fund?
The answer to this question depends in part on your particular circumstances. While some financial advisors recommend stashing three-six months of living expenses, others will say a year is ideal. Set a goal for yourself based on:
- Job security: If laid off, how long would it take you to find another position at your current job title/salary level? Are you a freelancer or small business owner? Employed in the private or public sector?
- Financial dependents: Is anyone, such as a spouse and/or minor children, counting on your income to pay the bills?
- Rent or own? Your housing status should also factor into how much you keep in reserve.
- Total living expenses: If your monthly expenses are fairly high and consume most of your income, you may want to try to pare back or sock more away in savings. The lower your monthly expenses, the more nimble you’ll be if you have to pivot after a job loss or other financial emergency.
If you’re young, earning an entry-level salary, and/or just starting your emergency fund, begin with an easily reachable goal such as $1,000 and level up from there. Giving yourself some low-hanging fruit first will keep you motivated to keep saving and growing your savings account.
Where should you keep your emergency fund?
Savings can be categorized as short-term, mid-term, and long-term. For example, your retirement savings are long-term. You won’t need to touch those accounts until you retire and, if you try to make early withdrawals, you could face extra fees and tax penalties.
A mid-term savings account could be for a specific goal such as a down payment on a house or a wedding. This type of savings doesn’t need to be completely liquid, as you won’t need the funds until a specific date. Thus, you could put mid-term savings in a Certificate of Deposit (CD) account to earn a higher rate of return.
As you may be guessing, your emergency fund is a short-term savings account. You never know when you’re going to need it, so you want to keep it liquid, meaning you can withdraw your funds whenever you need to. Here are the two best liquid account options for your emergency savings:
- Savings Account: Low minimum daily balance requirement to avoid service charges. Interest paid monthly. Unlimited in-person transfers and withdrawals so you can access funds when you need them.
- Money Market: Once you grow your emergency savings to a certain threshold, you can earn a higher interest rate while still retaining unlimited in-person access to your money.
When you keep your checking and emergency savings accounts at the same financial institution, you can easily set up recurring transfers to grow your savings.
What if there’s no extra money to set aside?
If you’re struggling to allocate money for emergency savings, take a second look at your budget. Are there spending categories you can cut back on? If you can’t find the money, look for ways to make extra money such as babysitting, dog walking, freelancing, selling homemade crafts and goods, etc. Even if you have to start small, a modest emergency fund is better than none at all.
Grow your emergency savings with Peoples Bank!
At Peoples Bank, we strive to enrich families and communities, and exceed our customers’ expectations in everything we do. Learn more about our Savings & Money Market accounts and CDs, and we can be a resource for you if you have further questions about saving. Contact us if you have any questions!