A major car repair, a sizeable medical bill, or a sudden job layoff can damage your finances. Limit the stress with a fully funded emergency savings account. That ready money will provide a financial safety net for you and your family.
An emergency savings account enables you to meet unexpected expenses and financial demands without putting you in debt or forcing you to dip into your long-term savings or retirement accounts.
How Much Money Should You Keep In An Emergency Savings Account?
The general rule of thumb is to aim for 3-6 months of living expenses. This includes rent or mortgage payments, groceries, utilities, transportation, and other essentials such as health insurance premiums. The more you set aside, the more secure you will feel when an emergency arises.
Here's how to calculate the amount needed:
- Track your expenses: Get a clear picture of where your money goes. Use Tropical Financials' online calculator, a budgeting app, or a spreadsheet to track your income and expenses for a month or two.
- Set a savings goal: Determine your emergency fund amount based on your expenses. Divide that figure into smaller, achievable monthly goals and use our calculator to determine how long it will be until you reach that goal.
- Automate your savings: Set up automatic transfers from your checking account to the emergency savings account. This ensures consistent growth and removes the temptation to spend that money.
- Reward yourself: Every time you reach a dollar-figure goal, splurge a little on a fun experience to keep you motivated to save more.
Should You Invest OR Save For Your Emergency Fund?
The key is accessibility and security. While the stock market offers potentially higher returns, it is not the ideal place for your emergency savings. You need quick and reliable access to your funds in a crisis. You also need to avoid the danger that your securities have lost value at the exact moment you need to cash them out.
Here are some reliable and accessible options at federally insured financial institutions like Tropical Financial:
- High-yield savings accounts: These accounts offer slightly higher interest rates than traditional ones while maintaining easy access to your money.
- Money market accounts: Similar to high-yield savings accounts, money market accounts allow you to write limited checks and access your funds through a debit card.
- Short-term CDs: If you can afford to lock up your money for 3-6 months, CDs offer guaranteed returns that are usually higher than savings or money market accounts. Check here for Tropical Financials' latest rates. If you need to redeem your CD before it matures, early withdrawal penalties may apply.
When Should You Tap Your Emergency Savings Fund?
Never tap your savings fund for impulse purchases or vacations. It's there for true emergencies. Use it only when you experience:
- Unexpected medical bills. No one plans for a sudden illness or accident. Your emergency fund can help cover medical insurance deductibles, copays, and prescription costs.
- Job loss. Your emergency fund can provide financial support while you search for new employment.
- Major home repairs: A leaky roof or a broken heating-air conditioning system can be costly. Your emergency fund can help you repair these and other home essentials without going into debt.
- Natural disasters: Floods, hurricanes, or other natural disasters can cause significant damage. Your emergency fund can help you cover temporary housing, food, and other essentials.
How Do You Replenish Your Fund?
Once you've tapped your emergency fund, prioritize replenishing it as soon as possible. Resume your regular contributions and adjust the monthly amount based on changes in your personal or family budget. The smallest amount saved today can make a big difference tomorrow when that next emergency occurs.