What’s the Big Deal about Emergency Savings?
We talk about it all the time. You hear about it from personal finance gurus and financial planners. But what, exactly, is an emergency savings account and why do you need it? Here’s the rundown.
What it is — An emergency savings account is money you have set aside in a liquid savings account (meaning you can deposit and withdraw money whenever you want) designated only for true financial emergencies. We’re talking big life events such as job loss, unexpected major home or car repair, or large medical bills resulting from sudden, serious illness or injury.
What it isn’t — It’s not quick cash meant to bridge the gap to your next paycheck. Nor is it a personal bonus that you can dip into when you get the itch to go shopping or need to pay bills. It’s for emergencies only.
Who needs one? — Everyone should have an emergency savings account,whether you’re single, married with a growing family, or your children have left the nest. Life happens to everyone, regardless of age, experience or income level.
How much should I save? — Expert opinions on this vary widely, but we recommend starting with an initial goal of saving 3 months’ worth of living expenses. Yes, it sounds like a lot — and it is — but you will be surprised how quickly your emergency savings account grows when you contribute to it consistently and don’t make withdrawals. Once you have 3 months covered, evaluate your current situation and decide if you want to continue growing your emergency savings or begin putting money toward other investments.
Can’t I just use a credit card for emergencies? — In some cases you can, but you probably shouldn’t. It’s a short-term fix that can actually make your situation worse. If you’re already experiencing a cash crunch due to lost wages or high expenses, adding to your credit card debt is only going to make your situation that much more overwhelming.
What if I just don’t make enough money to set any aside? We hear this question a lot, but you’d be surprised what a solid budget and commitment to a goal can do. If you feel like you’re already stretched thin and can’t afford to save, talk with us. Our free online financial assessment can help you get a clearer picture of your current financial situation and set you up on a budget with an amount dedicated to emergency savings.