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By Alliant Credit Union
Talk to any financial advisor and you will likely hear you need to start “saving for a rainy day” by establishing an emergency fund. For good reason too: An emergency can happen to anyone at any time. The financial impact of a major medical expense or job loss can derail your finances for years if you aren’t prepared.
When establishing an emergency fund, it is generally recommended that you save six months of necessary expenditures — emphasis on the necessary. These expenditures include housing, transportation, utilities, food, debt expenses (student loans, credit cards), healthcare and any other personal expense you deem necessary (yes, this could be your Netflix subscription, but try to be selective here).
Why six months? Most experts suggest saving at least three months or as much as eight, but six is about how long it takes most people who are laid off to land their next job and begin receiving paychecks or to cover the out-of-pocket expenses for those facing a major illness (provided, of course, that they have medical insurance).
If you don’t have an established budget yet, chase that goal first. You won’t know your necessary expenditures until you take stock of your financial position. This allows you to establish your baseline savings figure.
Whether you have some cash stored up already, or just a few extra bucks in your checking account, anything is better than nothing. Remember, stocking your emergency fund with cash should take priority over other savings goals because, well, you could need it before anything else. Worst case scenario: You can use the contributions you have made to a Roth IRA (but not the earnings) for an emergency until you have enough in your emergency fund. But you shouldn’t rely on this as your sole emergency savings account; you don’t want to rob your retirement funds if you can avoid it.
Once you know the amount you need, you can start funneling money toward your emergency savings. So where should your money go? You want to maximize your cash but will need it easily accessible in case of emergency. Therefore you don’t want an account that is susceptible to market changes or locks your funds away in a longer-term savings vehicle like a CD.
A high-yield online savings account offers the opportunity to make the most of your savings through a higher interest rate than most banks’ standard savings rate (17.5x higher, in fact), while maintaining the same ease of access you’re used to with a standard savings account. You can also set up multiple accounts and label them for your individual goals. This reduces the temptation to raid your emergency fund to pay for other savings goals, like a new car or a vacation.
If you’re not a seasoned saver, setting aside money every paycheck may take some adjustment. That’s ok. There are multiple methods to consider employing to beef up your savings. Here’s some tips for saving money:
Like I said before, anything is better than nothing. So get started today with a high-interest savings account and get your automatic payments flowing.