It’s one of the most common pieces of advice given by financial experts – build up an emergency fund. However, for many people, that’s easier said than done. With mounting bills and unexpected expenses, it may seem as though your savings account will never grow much larger than it is right now.
We’re here to help you build your savings and prepare for whatever challenges life sends your way. Start your journey toward reaching your savings goals today.
Evaluate Your Savings
Even those who are great at saving money may not be prepared for an emergency. The funds that you place in savings vehicles such as a Traditional IRA or a Certificate of Deposit may not be accessible when a sudden expense arises.
That’s why you should use a High-Yield Savings account or Money Market Savings account to build your emergency fund. These will allow you to earn interest on your deposits while maintaining full access to your money.
Funds placed in a Roth IRA account may also be accessible in the event of an emergency. However, you should be aware of certain restrictions, such as the ability to withdraw only the exact amount of your contributions and, even then, only after you have owned the account for at least five years.
Calculating Your Emergency Fund
The ideal amount that should be placed in an emergency savings fund will differ from person to person. A good rule of thumb is to put aside three to six months’ worth of living expenses so that you could get by in case of a medical emergency, job loss, or major repair bill.
Start off by learning how much you spend on necessities each month. This may include such expenses as:
Car payments and insurance
Mortgage or rent payments, home or renter’s insurance, and property taxes
Student or personal loan payments
Considering the amount that you’ll have to set aside each month for your emergency fund in order to reach your savings goals may seem overwhelming at first. Start off by aiming to save $500. From there, you can extend your goal to one month’s expenses, two months, three months, and so on. Setting smaller benchmarks can make your savings goals seem much more attainable and may help you succeed.
Reaching Your Savings Goals
If you are burning through your paycheck each week, saving may seem like the impossible dream. Take the first step by reviewing your budget to determine where each dollar is going.
Reaching your emergency fund goal may require you to be frugal for a period of time. Identify areas of your life where you can cutting back, such as dining out, cable, and shopping for new clothing. Making a few small changes in your spending habits can help free up a few dollars each pay period to be directed into your savings account.
For those with debt, you may want to look into consolidation options that can reduce your monthly payments and cut down the amount of interest you have to pay over time.
If after budgeting your money, you find that you can only put aside, say, $85 a month, that will still add up to over $1,000 a year in your emergency fund. Now just imagine if you could come up with that amount to put away each week!
Building On Your Savings Success
Once you have a month’s worth of savings, it may be time to think about opening a separate High-Yield Savings or Money Market Savings account just for your emergency fund. Keeping your funds out of sight will reduce the urge to spend your emergency cash on unnecessary items.
A separate savings account can help you keep an eye on how much you have in your emergency fund and how much more you need to save to reach your ultimate savings goal. Regularly evaluate your expenses after big events in your life such as buying a new home or having a baby to ensure that your emergency fund still meets your current needs.
"How to Use Your Savings Account to Build an Emergency Fund"
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