Being Prepared: Why You Need An Emergency Savings Account

The average American only saves 5% of his or her income.1 Not only is that not enough to retire with, it’s likely not enough for when disaster — or, at least, something unexpected and costly — strikes.

Why You Need Emergency Savings

You’re young. You’re healthy. You have a good, secure job. So why do you need emergency savings?

  • Job Loss and Pay Cuts: It’s hard to predict when you might lose your job. Even if you’re doing outstanding work, the company that employs you might stumble on hard times, or your industry might be… “disrupted.”
  • Medical Emergencies: Medical bills are the No. 1 cause of personal bankruptcy in America.2 While a broken leg might not send you to the poor house, it can set you back significantly.
  • Car Trouble: When your car breaks down, or even if you just blow a tire, don’t charge it. Pull the money out of your savings and forget it ever happened, rather than paying it off with interest over months or years.
  • Home Repair: This is the same basic concept as car trouble, but applies to things around the house — a broken faucet, a stubbornly clogged drain. Don’t go into debt when you don’t need to.
  • Unexpected Bills: Whether it’s last year’s taxes or a collection from three years ago, when you get an unexpected bill in the mail, save yourself some trouble and pay it off.
  • Unexpected Travel: From family medical emergencies to funerals, there are times when you have to travel unexpectedly. It’s usually not for pleasure, so don’t compound the hurt with debt.
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How Much Do You Need in Savings?

So you need emergency savings. How much? Generally, the gold standard is three to six months of living expenses.3 That means having enough stuffed under the mattress to cover the cost of everything you would spend money on — rent, bills, incidentals and so on — for three to six months.

How to Create An Emergency Savings Fund

The most important part of building up an emergency nest egg is getting started. You won’t get there tomorrow, but you will get there. Here are three strategies to save. You can use one or all of them to get where you’re going:

  • Percentages: Throw 10-30% of everything you earn into a savings account before you spend a dime.
  • Found Money: When you get a tax refund or a rent deposit back, throw most of it into your savings.
  • Budget Cuts: This doesn’t have to be painful. You can cut one small item from your budget and throw the savings into a jar.

Sure, saving 10-30% of your budget might sting a little at first. But when you have unexpected expenses, you’ll be glad the money is there.

Resources:

1. http://www.nerdwallet.com/blog/banking/american-personal-saving-rate/

2. http://www.nerdwallet.com/blog/health/medical-bankruptcy/

3. http://www.nerdwallet.com/blog/investing/is-your-emergency-fund-too-big/

Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice. 

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