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The Changing Nature of Emergency Savings
If you encounter a situation where you need to draw on your emergency funds, the chances are that you'll need access to the money right away. For this reason, emergency savings are typically kept in cash or in a traditional savings account. There are, however, a few other options, especially if your emergency savings are over the traditional minimum of three months of bills or $1000. Let's take a closer look.
How much do you need in your emergency fund? There are several answers to this simple question, but the right solution for you depends on your specific circumstances. To start, you'll need a savings account. Once you have that, you need to come up with how much you spend on bills and necessary household expenses each month. Experts suggest saving three to six months' worth of expenses in your emergency fund. This amount can be beneficial if you lose your job, fall extremely ill, or need to support your partner while they find a new job, etc.
A savings account is necessary because, while not helping you build wealth, it still allows your money to remain safe, insured, and to be completely liquid. What makes a savings account the best? High Annual Percentage Yield (APY) and the fact that it’s federally insured are the main things you’ll want to look for. Few other factors will impact your choice outside of these two things:
- 1% or Greater APY- When looking for a savings account, individuals typically want to look for one with a standard interest rate of 1% or more. This ensures that your money grows more effectively over time, helping you maximize the potential of your savings.
- Insured by the FDIC or NCUA- It's important that your savings account is insured. This guarantees that your deposits are protected up to a certain limit in the event of institutional failure. For banks, deposits are insured by the Federal Deposit Insurance Corporation (FDIC), while credit unions are insured by the National Credit Union Administration (NCUA).
- No Minimum Balance- It's also crucial that your savings account is completely liquid and incurs zero fees. This can be extremely beneficial if you ever need to use it all at a moment's notice.
Above all, it's essential to know that any option outside of a federally insured savings account comes with some degree of risk. Even keeping cash in your home can be risky. However, all of these options are relatively low risk. Here are some additional ways you store your savings:
- CD’s
- Stocks
- Bonds
- Money Markets
The key is to create the habit of saving, regardless of the amount, and gradually increase your contributions over time.
For more information on how to set up an emergency fund, access the full article here.
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