Why You Need an Emergency Fund
Short-term savings can be a financial lifeline when you have unexpected expenses or your income undergoes a dramatic change. For example, you might need to lean on savings if you’re laid off from your job or your water heater conks out. Aside from that, short-term savings can give you the freedom to splurge with your paycheck on occasion since you know that your emergency fund is there if you need it.
Action to Take: Open Goal-Focused Savings Accounts
When opening a savings account for the short term, it may help to take a goal-focused approach. You could open one savings account for your emergency fund and a second savings account to hold your “fun” money. First, determine how much you need to save each week, month, or year to reach your goals. Let’s say you want to save $3,000 for emergencies and $1,200 for fun money in one year. You’d need to save $250 per month in your emergency fund and $100 per month in your fun money savings account. Saving for emergencies first is important in case unexpected expenses arise, so you might plan to save the entire $350 per month for eight months in emergency savings, and then in month nine, shift your deposits from your emergency fund to your “fun” savings account for the rest of the year. You can further your short-term savings with some simple tricks:
Automate deposits to savings each payday. Have credit card cash-back earnings deposited into your savings account. Take advantage of windfalls (i.e. tax refunds, rebates, etc.) to fund short-term savings. Track your spending to look for expenses you could cut to free up money to save. Create a savings tracker to keep tabs on your progress:
Whether a regular savings account or high yield savings account makes more senseInterest rates and annual percentage yields (APY)Monthly feesMinimum deposit requirements and minimum balance requirements
Think about which features matter most to you as a saver. If that’s earning the highest APY, for example, you may want to choose an online bank versus a traditional bank. Online banks often offer more competitive rates than brick-and-mortar banks, even in low interest rate environments.
What to Do Next and More Resources
There are plenty of reasons why you need to have an emergency fund, as well as short-term savings for those times when you want to treat yourself. Aside from savings accounts, you can also use certificates of deposit to grow money that you don’t plan to use right away. Starting a CD ladder, for instance, can be a great way to earn interest while saving for long-term goals. Learn more about choosing a short-term savings account:
Best Savings Account Interest Rates Best Banks for Savings Accounts
