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How to set up, build, and maintain emergency savings
Key takeaways:
An Emergency Savings Account (ESA) is a safeguard against unexpected expenses. If you lose your job or experience a major medical emergency, an ESA can help you get through. An ESA allows you to seek medical care if needed and keep your home if you lose your income. It can alleviate stress due to emergency home and car repairs.
This guide explains the importance of ESAs. It looks at how they can save you money in the long run and give you peace of mind. We provide tips on how to set up, build, and maintain emergency savings.
Don't get caught unprepared for an emergency – make sure you have savings to protect yourself and your family. Learn how to get your employer on board to help you.
How much do you need in an ESA?
The standard answer for how much you need in an emergency savings account is three to six months of living expenses but in the wake of the COVID-19 pandemic, many financial analysts are recommending saving more. Suze Orman recommends having at least eight months’ worth of savings in case you’re laid off or get sick for a period.
Saving that much sounds impossible when you're starting from scratch but it's important not to get overwhelmed. Choose a smaller goal, start saving, and build as you go.
Identify a goal for your emergency savings
Saving is easier if you have a goal in mind. If the deductible on your car insurance is $500, for example, save until you reach that amount. Then, set a new goal – maybe you want to be able to replace your water heater if it stops working so you save $800.
Once you hit that goal, try to save up enough to cover your mortgage or rent payment and then, eventually, build up your account so that it has enough for an entire month's worth of bills.
These are just sample milestones. Yours may be different. The important thing is to use goals to motivate yourself. If you stay the course, you'll eventually have a nest egg that can insulate you from the risk of disaster.
How savings helps stop emergencies from growing
When you don't have savings, emergencies can become much direr and cost you more in the long run. Say, for example, that you have to take two weeks off work unpaid due to your child being ill and you don't have enough money for your rent payment. If you don't pay the rent, you may end up facing eviction.
With an eviction on your record and no savings for a down payment, you cannot find a new place to live. You end up moving into a long-term hotel that lets you pay by the week. This place is more convenient financially because you only have to pay for the first week upfront but ultimately, the monthly price is more than your rent and the living quarters are much smaller.
Due to missing a rent payment, you end up stuck in the hotel until you can save up enough to move, which may take years. In contrast, if you had emergency savings, you could have paid your rent and avoided this situation.
This is certainly not the only type of emergency that snowballs when you can't deal with it. Ignoring car and home repairs can also exacerbate the situation, lead to more damage, and cost more long term. If your engine is overheating, for example, you may need to spend a few hundred dollars on a new radiator but if ignored, the overheating could destroy the whole engine, forcing you to buy a new car or live without one.
How to set up your ESA
Now that you understand the importance of an ESA, you're probably wondering where to start. Ideally, your savings account should be a liquid asset that can be turned into cash easily.
If you have money in a savings account, you can walk into the bank and grab the cash at any time. A car or a property, in contrast, is not a liquid asset because you have to spend time selling it before you can access the cash. Similarly, stocks, bonds, and retirement accounts are not liquid assets because they take a while to liquidate or turn into dollars.
How can you avoid spending your savings?
While you're saving up money, it's normal to be tempted to spend it. If you're like most people, you probably have a long wish list of things you want and it can be hard to build that nest egg with so many temptations around.
Focus on why you're saving. Set goals and visualize how you are protecting yourself from common risks. After a few months of savings, you will be freed from the financial risks of getting in a fender bender, for example.
You will have peace of mind that if your water heater or HVAC system breaks down, you can cover it. Eventually, you can rest assured that if you lose your job, you'll have breathing room as you look for a new one.
Building accountability to reach your goals
Beyond focusing on the positive side of saving, find a way to build accountability. Maybe you have a friend or family member who can save with you and you can help each other stay on track. Perhaps, you cut up the ATM card linked to your savings account so that you can only access the funds if you walk into the bank. You can also ask your employer to set up a savings program at work.
Contact us about employer-sponsored emergency savings accounts
At Secure, we help people build their emergency savings accounts with the help of their employers. SecureSave, our workplace savings program, allows you to contribute money to your savings account directly from your paycheck which your employer can match. Our app allows you to easily manage your account and access your funds instantly.
To learn more about protecting yourself from emergencies, contact us at Secure today or sign up to request your employer provide SecureSave.