Why do I need emergency savings?
Everything you need to know about emergency savings, regardless of your financial situation
Imagine you’ve just returned from a great vacation abroad. You find out your close friends are getting married across the country in a few months. You go ahead and book your plane tickets, not wanting to miss out on the cheap airfare. You forget this is also the week you have an optometrist appointment and need to buy new contacts. Like always, rent is looming just around the corner and your checking account isn’t looking so hot. Unfortunately, payday isn’t for another week. What do you do?
These are all emergencies within your control. Save for rent and contacts (assuming you’re out), planning better could help you avoid this scenario. However, what happens when your car breaks down, your refrigerator stops working, and you need contacts all at the same time?
If you don’t have emergency savings, you might be able to cover the expenses on your credit card, but you’ll wind up paying more if you don’t pay it off in the same month. As of 2014, 1 in 4 Americans have no emergency savings whatsoever.
How much should I have in my emergency savings?
So, we’ve established you need emergency savings, but how much should you have saved? It depends on what your current financial situation looks like.
I’m still trying to get my debt under control.
When you’re struggling to keep your head above water without defaulting on debt, it’s difficult to think about having anything left over to save, but having emergency savings to pull from ensures you won’t need to create more debt by putting it on your credit card.
While it might not be easy, putting at least $1000 aside for emergencies can help you stay on track toward your debt repayment, even on a bad day.
My debt is under control, I’m still living paycheck to paycheck.
Now that paying down high-interest debt isn’t an immediate concern, it makes sense to set more money aside to increase your cushion. If you can manage it, setting aside 3 month’s expenses is a great start.
If you had an issue with employment or a larger emergency, you’d be able to cover those costs out of pocket, instead of on a high-interest credit card.
Note: You should calculate this number by monthly expenses, not income.
I’m comfortable financially.
At this point, at least 6 month’s expenses would be ideal to have saved away. However, depending on your industry of employment, you might want to save more. If you believe it would take you longer than 6 months to find a job after losing yours, it would make sense to save as much as you would need to cover a gap in employment.
Where should I keep my emergency savings?
Since they’re emergency savings, it makes the most sense to store them somewhere that’s as accessible as possible and isn’t at the mercy of the market. However, when you choose to go with a typical savings account, you wind up losing value when you aren’t even earning enough interest to beat inflation.
Ally is my favorite option here. With an APY of 1.9% on all balance tiers for their savings account, you stay very competitive with inflation and don’t need to worry about your money losing value. Plus, you’re not at risk for market swings.
(I’m in no way affiliated with Ally, I’m just a super fan of their online banking.)
Whether you’re still paying down high-interest debt, or you’re more financially established, having emergency savings set aside is an important precaution to take to ensure you’re not forced to accumulate high-interest debt in the case of an emergency.