Emergency Fund

The Importance of Emergency Funds: How to Save for Unexpected Expenses

9 mins read

The Importance of a Safety Net

Growing and maintaining an emergency fund is an incredibly important financial step. Life tends to place unexpected financial roadblocks in our way. Your emergency fund can help prevent your life from spiraling out of control when these unexpected expenses hit. Not only can a little financial safety net help you in an emergency, but it can benefit your life in a myriad of ways. 

The recommended size of your emergency fund hinges on several factors. Your lifestyle, monthly costs, income and dependents all add into how much money you should have stored away for a rainy day. Typically, a good rule of thumb is to have at least 3 to 6 month’s worth of expenses in an emergency fund. This way, if an unexpected job loss occurs, or if you are suddenly saddled with an expensive medical bill or car repair, you can continue on with your life while still paying for these expenses. 

There are many different types of savings accounts that you can invest in. First off, it is a simple process to open up a savings account with your current bank. Many banks have an automatic savings transfer option that you can select, in which an automated amount is transferred from your checking to your savings account each month.

In addition, you could also invest in a high-yield savings account. With this type of account, the interest rate offered is typically higher than your traditional savings account. However, sometimes with these types of accounts there are usually higher minimum balances required. Also, you will want to watch out for hidden fees to open the account and any maintenance fees that may be associated with your HYS account. 

Certificate of Deposit (CD) accounts, Money Market accounts and Individual Retirement Accounts (IRAs) are all other types of accounts you may want to consider investing in as well. It is important to find a savings account type that works best for you and your financial needs. You will also want to pay special attention to the requirements for withdrawing funds from each account, as these can vary greatly based on account type. 

Once you determine what type of savings account you want to work with, you can begin stashing some extra cash away. Having an emergency fund is important for several reasons. Emergency funds: 

  • Lend to financial stability
  • Solidify financial independence 
  • Create room for opportunities

The importance of financial stability can not be understated. According to a study by Duke University, Americans have reported feelings of anger, irritability, fatigue, sleeplessness and increased muscle tension due to financial stress. The long term side effects of these feelings can do irreparable damage on one’s physical and mental health. When unexpected life expenses strike, the inability to pay one’s own bills can be extremely stressful. Having a safety net helps to alleviate that stress, by providing financial means to take care of various problems. 

Secondly, while taking control of one’s finances can seem intimidating at first, it is also an incredibly empowering experience. We have all heard the phrase money can’t buy happiness. While this is true, a study from Princeton University argues that financial independence can indeed equate to happiness. It is a powerful experience to be able to effectively and efficiently handle life’s finances. 

Finally, emergency funds allow individuals to seize opportunities. Many big purchases in life can happen on an expedited timeline. For example, when purchasing real estate and vehicles, inventory often moves fast. Buyers with readily available funds often win in these situations because they can make the first moves on these opportunities. 

The Toll of Unexpected Expenses

As previously discussed, financial stress is considered a top stressor for Americans. The American Psychological Association reported that at least 72% of Americans reported feeling stressed about money and finances within the past month. With 8 out of 10 Americans worrying about stress daily, investing in a savings account is an under-utilized resource. 

When unexpected expenses strike, individuals oftentimes have no choice but to desperately search for ways to obtain emergency cash. This is a slippery slope that can lead to many problems down the road. 

First, when in an emergency situation, consumers are likely not taking the time to review and read all loan terms and conditions. This is an easy situation for an individual to sign a loan agreement that they might not have signed otherwise. Furthermore, many loans that have a quick turn around also carry a high-interest rate. People in emergency situations do not have time to shop around for different loan rates or to spend time calling different banks and credit bureaus. This can easily lead to taking out a high-interest loan. Over time, individuals can end up paying thousands of dollars more on their debts if large amounts are going to interest. Make sure to research your loan options thoroughly before you sign and compare rates. Search Michigan title loans for example to find different options.

Tips and Tricks for Saving

By saving gradually each month, you can work to slowly -but steadily- grow your emergency fund! The good news is there are moves that you can make starting today that can set you up for success to meet your financial goals. 

A few steps you can take to increase your savings include: 

  • Setting goals
  • Incorporating automatic savings 
  • Re-allocating bonus funds 

First and foremost, it is important to set savings goals. While it is a good start to have an established account of at least 3-6 months worth of expenses, that is not where you need to stop! Establishing a savings account with which you can make large purchases, upgrade appliances and make investments is incredibly important. By determining your goals and setting your sights on what you want, this will help motivate you to save.

There are also many ways you can make small savings each day. There are many apps that can help you make small changes each month to save. Acorns is a well-known savings app that allows you to round-up purchases and set up small recurring transfers to establish an account over time. In addition, apps like Mint and Oportun help you to analyze the funds that go out of your checking account each month, and can help contribute to your savings. 

Having a savings mindset will also change how you look at different influxes of funds. Consider changing the way in which you allocate funds like bonuses, financial gifts and other types of additional income. While it previously may have been tempting to spend that money on fun and entertainment, you may want to consider using all or a majority of that money to grow and invest in your savings!

Regardless of which of these methods you choose to implement, rest assured that any efforts you put towards investing in your savings will be well worth it!

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