Emergency Savings: When and How to Start
Clinkety-clink-clunk! Yep, that’s the sound of your car needing about $1,000 worth of work to start running again. If you haven't saved enough money, you might decide to rely on your credit card. Quickly, your debt begins to add up before your eyes--with interest. It’s time to get out of this mess.
Picture this scenario again when you have savings that are easily accessible. $1000 is still a lot of money to fork over but you have saved additional funds for this purpose. This means you’ll have no added costs in paying back interest. The real question you need to ask yourself is, “Can I afford NOT to save?”
According to a 2011 survey by the National Foundation for Credit Counseling, 64% of Americans don’t have enough cash on hand to handle a $1,000 emergency. Likely, you’ll run into some sort of expense that’s out of your control sometime in the next decade, whether it’s a car accident, broken water heater or losing a job. These things require a lot of money. It’s important to store money somewhere accessible for moments like these.
How much should be put away for emergencies?
That’s a good question, and the answer varies greatly. It’s generally advisable to save between 3-6 months’ worth of expenses. Depending on your personal circumstances, you might need more or less. For example, if you work in a field with lower job security, you may want to save money to prepare for the possibility of losing your job. If you’re retired and have adequate health and long-term care insurance, you might not need to save as much.
To determine what that means for you, think about the “what ifs” in your life—would you be prepared if any of them happened to you?
The problem is that some people see that number and decide it’s not even worth trying. If they can’t quickly hit their goal of saving 3 months’ expenses, they simply don’t save at all. The thing to remember is that SOMETHING is definitely better than NOTHING. Even a little bit of money saved can help when you’re in a pinch. Keeping the money in an easily accessible account ensures you can get the money right when you need it. You may not earn as much interest on it, but you can rest easy knowing your money is safe.
When do I start?
The time to start saving is right now, no matter if you’ve been in the working world for a while or if you’re just starting out. The way to start saving is to simply build the habit. Decide early in your career how much of your paycheck you want to put away for emergency savings: this should be anywhere from 5-15% of your monthly income. If you can, make it automatic. That way, your money is saved without any manual transfer, allowing you to avoid the temptation to spend some of the money.
Another reason to save, besides preparing you for life’s unpredictable moments, is to give you peace of mind. According to a recent survey by Synovate, 90% of those without an emergency savings fund reported feeling very or somewhat stressed about their finances. In comparison, only 56% of those with a strong emergency savings fund with over 6 months’ worth of expenses reported stress over finances. For most people, more savings equals less stress.
Written by Katie Switzer
This blog post is from the Author's perspective and doesn't speak for brightpeak financial. Contact brightpeak if you want to know more about brightpeak products, and keep in mind that they are not available in all states and there are some limitations (some exclusions and restrictions may apply).