Rethinking emergency savings
Job loss and underemployment in recent years have left millions of Americans in financial turmoil, as families have had to drain their savings to sustain themselves.
Other emergencies can deplete family resources, as well. Costs can quickly pile up if you get sick or injured, face a legal fight or lend a hand to a friend or family member in financial peril.
That’s where the emergency savings account comes in -- a bank account specifically designed to provide a safety net in case of life’s unpleasant surprises.
Typical advice on emergency savings goes something like this: You should have enough cash accessible to pay at least six months of expenses in case a personal financial crisis hits.
This might mean you have to sock away cash every month to reach your goal.
Although it's never a bad idea to save a little each month, planning for emergency savings isn't a one-size-fits-all process.
Follow these 5 tips to help build a comfortable emergency savings account that will make you as prepared as possible for the unexpected:
Tip 1. Know how much savings is enough savings.
Saving enough money to pay your bills for six months is a good starting point, but advice this broad can’t fit everybody’s needs.
Your job, the economic climate, your dependents and your ability to draw on supplementary income all factor in to what your monetary goal should be for your emergency account.
We talked to several certified financial planners whose advice was pretty consistent. They say a good rule-of-thumb is to build enough savings to make you feel secure, but not so much that you limit your long-term financial success.
Your savings goal might be a moving target as your income, expenses and career potential change. Don’t get locked into one number.
The planners also suggest you should only touch your emergency savings for true financial emergencies like a job loss or health problem. It’s not sitting there to buy a nicer car or take that vacation to Hawaii.
Tip 2. Wipe out credit card debt first.
You shouldn’t save for a financial emergency if you already have an emergency brewing in the form of high-interest credit card debt.
Pay off your credit card debt before putting away money.
Our credit card calculators can help you find the fastest, cheapest way to repay a single card or all of your cards.
And speaking of debt, you know those checks your credit card company likes to send you with offers of no interest for a set period of time? They actually come with high fees and high interest rates down the road.
Don’t consider credit card advances a form of an emergency savings account.
Tip 3. Don’t forsake retirement planning.
One of the easiest places to find the extra money to start funding an emergency savings account is from your retirement contributions. This is usually a bad idea.
If your employer matches your 401(k) contributions, it's a great financial perk. Don't pass it up, but you can consider reducing your contribution to the minimum required to qualify for matching funds.
Instead of sacrificing retirement, look for ways to reduce spending. Online shopping and coupon sites like Groupon are great places to start. The extra savings you can earn can make a monthly contribution to an emergency savings account feasible.
Tip 4. Find the best savings rates.
It’s a good idea to keep your emergency savings account at a different bank from where you keep your checking account. By separating the two accounts you make it less tempting to tap into those emergency savings.
Online banks typically pay higher rates than the passbook savings account rates your local banks offer.
Tip 5. Be creative.
If you have extra income that comes in from a part-time job, hobbies or even selling items on EBay, consider funneling some of that money into your emergency savings account.
You can also set up the dividends or interest payments from your investment accounts to be swept electronically into emergency savings.
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