The JA Guide to Having an Emergency Savings Fund

Author: Hannah Henry
Financial Literacy
Published: Tuesday, 13 Aug 2019

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As the talented Lindsey Vonn once said, "It's amazing. Life changes very quickly, in a very positive way, if you let it." With these changes, it's essential to consider how it will impact your financial stability. The top life changes that cause the most financial strain? Starting a family, divorce, and taking care of a loved one. Yet, there are more frequent changes in life that cause stress such as a car accident, getting ill, or having to move due to a job loss.

A study conducted by the American Psychological Association found that 72% of Americans reported feeling stressed at least once in the past month. Additional stress in one's life is connected to insomnia, severe headaches, increased rate of heart attacks, among other serious side-effects.

What is one to do? Unexpected life changes are not planned, but by thinking ahead with your savings account, you're more likely to come out on the other side in better shape.

What is an Emergency Fund?

An emergency fund, also referred to an emergency account, is a financial safety net for unexpected changes that may occur in the future. Unforeseen factors may include a job loss, debilitating, illness, or major repairs needed to a home or vehicle.

A secondary purpose of creating an emergency fund is to avoid the pitfall of relying on credit cards to cover expenses. Relying on credit cards when you don't have the funds to cover expenses will make it more challenging to make a financial-comeback. This is primarily due to the interest that will be added to your monthly statements.

How Much to Save for an Emergency

At the very least, you should have $1,000 in a mini emergency account. This is referred to as a bank account buffer. This is not for big emergencies in life, but rather a smaller cushion that will help in case you have an overdraft, or if there is a small emergency that requires you to pay immediately. This type of savings should not be relied on as a safety net as it is not meant as a long-term savings solution.

A good rule of thumb is to save three months of living expenses. For example, if your monthly living expenses; including food, transportation, shelter, and clothing is $2,000 a month, you will want to save a total of $6,000. Depending on your age and lifestyle, the amount you want to have in a savings account will vary.

If you have other individuals in your home depending on your income, you will want to save more than just the minimum. It has been suggested that your emergency fund should be six months’ worth of living expenses. In addition, to ensure better financial stability, you may want to double the amount of the emergency funds should your work have a high turnover or injury rate. This will provide more of a cushion should anything happen to the primary earner in the household.

In a perfect world, an emergency account with a full 12 months of living expenses is ideal. While this isn't feasible for many, saving as many months of living expenses as possible will ensure a good security blanket should you or your family fall on hard times.

Where to Keep Your Emergency Savings Cash Fund

A box under the bed is the worst place for your emergency fund. Not only is it completely vulnerable but it is also not accruing any additional value. Discover identifies these "homes" for your emergency savings:

High-yield Bank Accounts: The benefits of keeping your savings in this type of account include being able to access your savings at any time as well as have your savings earn interest on deposits. When looking into this type of account, look for accounts that have a competitive interest rate and no monthly fees or balance requirements.

Money Market Accounts: these accounts are similar in nature to savings accounts as they can offer higher yields. With this type of account, you can deposit your money at a local bank and access your account online or at an ATM. When choosing this type of account, it is important to check to see if there are any fees for withdrawals.

Certificates of Deposit: also called CDs, these accounts will offer a fixed-rate for a specific amount of time. Remember, these accounts will "tie" your money up, meaning you will be unable to access it unless you are willing to be charged a fee.

Looking to get your student thinking ahead? Check out JA Searching for Savings!