Experienced a pay cut? Here’s what to do next:
- Discuss a plan with family members
- Adjust your budget or create a new one
- Trim non-essential expenses
Picture it: You’re settling in on the sofa for your favorite Sunday night show and, just as the opening credits start rolling, something drips on your shoulder.
Can’t be water, you’re inside. Plus, you’re… directly under the upstairs shower. And, someone’s using it. A quick glance upward reveals your latest headache: a brown spot that screams plumbing issues. How much is that going to cost?
Costly repairs and emergencies happen out of the blue, and often at the worst times. If you plan for unexpected expenses, however, you can keep these surprises from derailing your financial plans.
Keeping a rainy day fund is one way to ensure you have the money you need in a pinch, without having to reach for a credit card or dip into savings you’ve earmarked for other financial goals. In fact, automating your savings by setting up a recurring transfer to an emergency savings account may be one of the smartest financial moves you can make when you consider how frequently unexpected expenses crop up.
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“When people actually review what they spend over a year, they discover that somewhere between 20 percent to 40 percent are expenses that don’t occur on a routine basis,” says Carol Craigie, a Colorado-based certified financial planner at Fiscal Fitness Clubs of America. These unexpected expenses could include everything from car repairs to doctor bills. “Then there are the really unexpected curveballs that life throws at us,” she adds, such as major home repairs, prolonged illness and job loss.
That said, unexpected expenses aren’t always negative, says Kathryn Hauer, a financial literacy author and certified financial planner in Aiken, South Carolina.
“It might seem as if financial planners nag too much about the importance of an emergency fund, but another way to look at those savings [is to view them as] funds for a ‘happy emergency,'” she says. “Happy” could be anything from your child being chosen for an elite sports camp to you hopping on a plane to accept an award from your industry’s top trade association.
While many people have a traditional savings account, that money is often used to manage bills and everyday expenses. A separate savings account at an online bank can be a great way to maintain a rainy day fund and plan for unexpected expenses. Here’s why:
If it seems like banks charge more and more fees as time goes on, you’re not mistaken. According to The Pew Charitable Trusts, banks have more than doubled the revenue they collect from service charges over the last 30 years. Though many of those fees apply to checking accounts for things like overdrafts or a bounced check, savings accounts are a source of revenue as well; at big brick-and-mortar banks, savings accounts generally come with monthly maintenance fees and/or minimum balance requirements.
Not so for most online savings accounts, which often come without minimum balance requirements or maintenance fees. No minimum means you can start small and save little by little, building up your rainy day fund to help with unexpected expenses over time. And without a monthly maintenance fee, every drop of your hard-earned savings will go toward your rainy day fund and earn interest.
“It might seem as if financial planners nag too much about the importance of an emergency fund, but another way to look at those savings [is to view them as] funds for a ‘happy emergency.”
Interest rates at online banks are often higher than their counterparts at traditional banks. According to the FDIC, the national average annual percentage yield (APY) on savings accounts is 0.08% APY, compared to some online banks offering around 1.75% APY. Higher interest rates (and APYs) can help with unexpected expenses because your savings earn more money between emergencies.
To put it into perspective: A deposit of $10,000 in an online savings account earning 1.75% APY will earn around $175 over the course of a year. Compare that to only about $8 in an account paying the national average, as calculated by the FDIC.
Online banking is easy and mobile. Most online savings accounts can be set up and funded electronically at no cost, after which point they are accessible 24/7. Additionally, most allow you to easily deposit checks via your phone, meaning money that should be available for use in the event of an emergency won’t sit around un-cashed until you have a chance to swing by the bank. We all know how busy life can get.
Another convenient feature of mobile banking is the ability to check account balances on the go so that you can monitor your emergency fund at any time. That accessibility can take the stress out of emergencies—it’s easier to plan for unexpected expenses when you can quickly check in on your emergency fund to track your savings progress and determine if you have the funds to cover what’s come up unexpectedly.
Around-the-clock customer service is available from most online banks. That said, it’s worth doing your research ahead of time to get a full picture of the bank’s customer service offering. Make sure you can reach someone by phone, an app or even live chat when you have questions or need extra assistance. The goal is to ensure that you never feel like your money is out of reach, especially when you need it to help with unexpected expenses.
Everyone’s income and expenses are different, so determining how much to actually put into your rainy day fund will vary. Most experts recommend saving at least three to six months’ worth of living expenses to be used in the event of an emergency. If you don’t have the savings for an emergency fund available offhand, take a good look at your budget to see how much of your income can be diverted to your emergency account in a recurring monthly transfer.
And, if you do need help with unexpected expenses and end up tapping into your rainy day fund, always be sure to restock that account. Your next unexpected expense could be sooner than you’d think.
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