Want to be financially stable? Then you need an emergency savings. It is the best way to handle all of the little financial ups and downs that life throws at us.
A well funded emergency savings should have at least 6 months worth of expenses in it. That will allow you to get through just about any financial emergency that might pop up. If you do not currently have one, here is what you need to do.
Setting Up Your Emergency Savings
Setting up an emergency savings is easier than ever these days. You can handle everything from the comfort of your home office.
Open A New Savings Account
Obviously, you need a savings account but what might not be so obvious is where you open this account. The last thing that you want to do is open an account with your regular bank that is linked to your checking. This would be easy but it creates a big problem.
If your savings account is too accessible, with instant transfers, it can become victim to temptation. Any time that you get the urge to spend, all you have to do is open your checking account app and the money is yours.
The solution to this is to open an online only account. Online banks can still be linked to your checking but transfers generally take a full business day to process. This means that you will still have access to money in the event of an emergency, but you will also have at least 24 hours to change your mind. That should curb impulse spending.
A side benefit to using an online savings account like one from Citizens is that the interest rate will be higher. Often over ten times higher.
Set Up Automatic Payments
Next, you need to automate your savings by setting up recurring payments to your new account. This is very easy to do with your regular checking. Nearly every account allows you to set up recurring transfers on certain dates. Make your transfer the day you get paid so that you never really see the money in your account.
As for the amount, ideally you should be saving 10 percent of your take home pay. If you bring home 2000 dollars a check, you should save 200 dollars of it.
10 percent might seem steep, but it is a critical number. Saving at least this much will make it much more likely that you will be able to retire some day. Once your emergency savings is funded, you simply start moving that monthly transfer to an investment account.
Divert Money To An Investment Account
Once you have successfully saved at least 6 months worth of expenses, the saving is not over. Saving should be a lifelong thing, so instead of stopping, you will simply divert your money into an investment account. Consult a local financial advisor for advice.
Why Emergency Savings Are Crucial
There are a lot of reasons why emergency savings accounts are so important. Here are just a few of them.
You Can Avoid Loans
If you do not have the money that you need to handle an emergency, what are you going to do. For many people the answer is taking out an emergency loan. Websites like loanbynumbers.com will be more than happy to help you get an offer, but it will come at a cost, high fees.
Annual percentage rates for emergency loans like payday loans can be well over 400 percent. This is wasted money that you can not afford to pay and remain financially stable.
To Avoid Credit Card Debt
Another major way that people handle a money problem is with credit cards. This is one of the reasons that the average American has nearly 10,000 dollars in credit card debt. With interest rates as high as 29 percent, it can be a tough debt to get control of.
Because You Are Self Employed
Self employed people need an emergency savings more than any other group. Being self employed is a dream of many, but it comes with one big problem, uncertainty. You never really know how the business is going to go and if income takes a dip, it affects you immediately.
Paying For Home Repairs
Owning a home is great, but there is a catch. When you own a home there is no landlord to call. If the water heater blows up or the AC goes out, it is all on you. Having an emergency savings account can let you handle these little home emergencies without taking on debt or having to do without a major component of your home.
