Why You Need Emergency Money
October 7, 2019
Preparation for events of emergency begin with your financial stability. Just like life, your income can become subject to change, and it’s a good idea to be ready for anything. Consider steadying your income by opening an emergency fund for the events you can’t plan for.
What is an emergency fund?
An emergency fund is money saved for unanticipated events of difficulty or quick change. These events might include unemployment, quitting a job, a medical emergency, and/or unexpected transportation (flights, broken car, etc.).
Savings vs. emergency fund, what’s the difference?
These two accounts do overlap in their uses; however, their purposes are what distinguish one account from another. The point of your emergency money is that it is separate funding that is only accessible upon emergency. You can think of your emergency money as a life jacket—you might not always need one but when you do, it saves you from frantically treading water.
Your traditional savings account can hold money for any purpose: a house, a car, clothes, or a rainy-day fund. You can store your emergency money in the same account as your savings account but it might be necessary to separate your funds if you’re susceptible to dipping into your savings to get a little extra cash for the moment.
To have a life jacket, you need to invest in one. For the same reason, it’s important to safeguard your emergency money—even if that means protecting that money from yourself, too.
How to build an emergency stash
NerdWallet suggests an emergency fund of three to six months of expenses. This includes your rent, utilities, food, and any other recurring monthly expenses. You want to save enough money to comfortably continue living your current lifestyle and afford your necessities.
Consider going through past bank statements to see how much you typically spend each month and aim to multiply that number by however many months of income you’d like to have saved. The amount of money you pool is up to you.
Where can you keep your emergency money?
Given that this fund could sum several months of income, you’ll have a large chunk of change that could grow depending on where you decide to house this money.
Places to store your emergency money include:
- Roth IRA – Roth IRAs are can be great because your contributions to this account are derived from money after Amongst the other benefits, you’ll want to consider contribution maximums as well as all the rules for eligibility.
- High Yield Savings — A high yields savings account might be a good idea if you’re at the beginning of your savings journey as many accounts are offered without any minimum balance requirements. Some of the best high yield accounts offer over 2% annual percentage yield (APY).
- Certificate of deposit (CD) — A certificate of deposit might be the best choice if you already have money that needs a home with a higher APY and you won’t be needing this money for a longer period of time. CDs tend to have higher rates than traditional savings accounts and have penalties for money withdrawn before your CDs time of maturation.
- Traditional Savings Account — A traditional savings account offers the most secure location to store your money as they tend to be FDIC insured (depending on the account and banking institution). This might be a good option if you’re still researching which of the above choices could be the best fit for you or if you’re looking for a simpler option.
You work hard for your money and your money should do the same. Consider investing in your future by saving a portion of your income to pad your lifestyle for harder times. With an emergency stash stored away, you can take risks or continue living the way you do now knowing you have a safety net. An emergency fund gives you these options.
Ready to be the boss of your finances?
Start by figuring out how much you should save each month.