Emergency savings: A neglected part of financial wellness
You’ve heard the rule of thumb: Have an “emergency savings” set aside for unexpected costs. It’s a simple enough idea, but most Americans put it at the back of their financial priority list. In fact, more than 50% of Americans say they couldn’t come up with $500 at a moment’s notice.
Compared with the drumbeat about saving for retirement and paying down credit cards, emergency savings seem like, well, less of an emergency. With monthly expenses to cover and debt to pay off, many people say there is nothing left over. But there should be and can be, and we’re here to help show you why:
What exactly counts as an “emergency?”
An emergency should be defined as something that impacts your ability to pay your monthly bills. This might be a job loss, a health-care crisis, a disaster like a fire or accident, or major unexpected repairs such as a new furnace or transmission – anything that has a substantial financial impact on your family. Major, one-time costs, like car registration renewal or holiday gift shopping, can catch one off guard, but these are not emergencies. Budgeting for these instances should exist separately from an emergency fund.
How big should my emergency fund be?
Ideally, at least three months of income. Some emergencies, like repairs, are a one-time cost. Others, like job loss or health care crisis, can play out over time, and may even require a permanent change in your lifestyle. Three months’ income is generally a big enough number to cover many one-time needs. For long-term emergencies, three months’ income buys you time to adjust your budget, find a new job, or give you time to recovering costs through insurance.
Where should I keep my emergency savings?
Keep it somewhere separate, while balancing accessibility with security. The main thing about emergencies is that they are urgent. Real estate and long-term bonds are often not quickly or easily accessible. Volatile vehicles like stocks – which can drop on any given day – aren’t good either. Start with a basic savings account, perhaps supplemented with a money-market account or special flexible certificate of deposit (CD) that allow early penalty-free withdrawals in emergencies.
How can I save up that much money?
Just start. Like all big challenges, saving can only be tackled one step at a time. The best first step is to come up with a plan. Open the accounts and set up transfers. Better still, work with payroll at your employer to set aside money automatically. If you get a windfall, like an inheritance, bonus or raise, move a good chunk to emergency savings before you can spend or come to rely on it.
We get it: When faced with an emergency one is often overwhelmed. But, planning for emergencies can make them less daunting and sometimes preventable. Committing three months of income is a challenge for most Americans. But by setting realistic, achievable steps, you will see progress. Some is always more than none. Let Alerus be your coach. We view emergency savings as one of the five big facets of financial wellness, and our advisors can help you balance all of them in a way that fits your life.