Emergency savings: Learn how to start them, how to maintain them
Has life ever thrown you a financial curveball—an unexpected medical expense or car repair, even a job loss—that you didn’t have emergency savings to cover? If so, you’re not alone: Almost one out of four people don’t have an emergency fund. Of those who do have savings, nearly 40% have less than one month of income set aside.1
These five steps may help, whether you need to start an emergency fund or would like your existing savings to be a little more robust.
Step 1: Calculate how much you need in an emergency fund.
It can be easy to get overwhelmed by recommendations for emergency funds: three to six months of your expenses. That big total may feel completely unreachable.
Instead of focusing on the end goal, try setting a mini goal. How long would it take you to save $100? How about $1,000? The important thing is to get started, then consistently add to your emergency fund. Eventually, you can decide your end goal—and a date that’s doable to reach it.
Step 2: Pick how you want to start an emergency fund.
Two options can help you build up an emergency fund over time, and boost it in big jumps, too.
- Automate it. Have regular emergency fund contributions direct deposited from each paycheck into a savings account. If you set aside $25 a week, at the end of two years you could have $2,600 saved.
- Transfer it. Use money from a bonus or tax refund to build your total emergency fund savings faster. Another idea: If you have extra from your budget at the end of a month, you could add that, too.
Step 3: Choose an account for your emergency savings.
Because those savings are designed to be readily available, an account that’s liquid and accessible offers a useful spot for your emergency fund. You may want to put some constraints on it, though—for example, online but not ATM accessible. Or, a high yield savings account with minimum balance requirements may be a good fit, too. (You can compare online bank savings and money market rates.)
Step 4: Set some parameters for using your emergency savings.
“Emergency” varies by person, but generally could include expenses that are unexpected, unavoidable, or urgent. For example:
- Unexpected: You’ve lost your job and need to pay the bills.
- Unavoidable: It costs more to fix your broken refrigerator than to buy a new one.
- Urgent: Your dental bill isn’t covered by insurance.
One big question that many people have: Should they use emergency funds or put a bill on a credit card or rely on a loan? If you do the latter—credit card or loan—you’re adding to debt, and will likely have to pay interest, fees, and perhaps even penalties.
Step 5: If you use some of your emergency savings, make a plan to replace it.
The tools you used to set up your emergency fund—automating deposits, adding extra savings when you can—can help you build that account back up.
The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.