Introduction:

Dive deep into the importance of having emergency savings. Discover effective ways to build one up, where to store emergency funds, and helpful tools created to help you out.

Unexpected things always happen. They can be taxing on our mental, emotional and spiritual state, but they can also devastate our finances.

With a little planning and discipline, an emergency fund can help prevent or lessen the increased stress and chaos.

If you haven’t read part one, you can find it here. It covers a wealth of information to help build a strong financial foundation. It includes some pre-budget steps to create a personalized budget plan.

Let’s get right into it!

DISCLAIMER: NOT FINANCIAL ADVICE

I have done my best to ensure that HowdyAce.com aims to provide accurate and valuable information on personal finance, but it may not apply directly to your individual situation. 

The content on HowdyAce.com is for informational and educational purposes only and should not be understood or construed as professional financial advice.

I am not an attorney, accountant, or financial advisor/planner, nor am I holding myself out to be. The information provided is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation.

Should you need such advice, HowdyAce recommends that you seek advice from a financial professional before making any serious financial decisions.

Emergency Savings Account

Unforeseen circumstances will always pop up in life. They can range from job loss, toxic work environment, divorce, car repair, unexpected medical expense, natural disaster and everything in between. They are unavoidable.

The good news is that we can help avoid financial burdens with some financial planning. I’m sure you’ve heard the term before, emergency savings. They are also commonly referred to as rainy day fund, and fuck-off fund (my personal favorite).

If we do not have emergency savings, then it needs to be a priority in our budget.

Benefits of an Emergency Saving Account

An emergency saving fund becomes our saving grace. It is like our personal insurance that is free-of-charge. They prevent us from having to take on debt when emergencies strike.

A funded emergency savings account is meant to help lessen the future blow. Knowing that we are financially stable becomes one less thing to worry about. We can use our energy to focus on more important decisions and returning back to a joyful state.

Start Small

With so many demands on our money, the thought of building up a savings account may feel impossible. That is why I suggest starting small and building up. Set a goal of $1000 or, better yet, one month worth of basic necessities.

The process of savings can be as simple as setting aside $1 a day or a percentage of each income. If you like challenges, get creative and try out the $5 bill challenge or 52-week challenge.

Again, it doesn’t matter what you do. The key is building the habit of savings for our emergency savings account. With time, we will have a fully funded account and can allocate the savings towards other financial goals. 

Traditional Savings Account

Put this money in a separate savings account so that it’s not easily accessible. If you don’t see the numbers, you won’t be tempted to spend it.

It can be the same bank as your checking account or an entirely separate bank. Make sure that it’s an account that you can access the money in 24 hours or less.

Build Up

Once we have that down, we can begin building up an emergency saving to 3-6 months of basic necessities or ~$12,000-$18,000 (numbers vary per person). This should be the goal if all debts are paid off.

Building emergency savings is crucial and should be done even if we have debt. Our first focus is to save $1000 or 1 month’s worth. Then, focus on paying down high-interest debt (I.E. credit cards, private loans, etc.) before building bigger emergency savings.

In personal finance, there are always exceptions to the ‘rules.’ As you learn and understand more, you’ll be able to weigh the pros and cons. It will give you the confidence to make the best decision for your current situation.

Build Bigger

Eventually, we can continue building up to 1 year worth of living expenses depending on our risk tolerance. Building a bigger emergency fund would be a great goal after all debts have been paid.

An exception here is having a mortgage with a low-interest rate or investing in something with a greater rate of return. Again, get informed and determine what is best for you.

Savings Accounts

While we are building our emergency fund, it is important to separate the money from our checking accounts.

Having a separate savings account prevents us from seeing and dipping into the funds. I suggest having two emergency savings accounts: a traditional savings account and a high-yield savings account.

• Traditional savings account:
  • For savings below $3000 that you can access easily, within 24 hours or less at ATM, bank, cash in safety deposit box
  • Can be the same in the same bank as your checking account or another bank

• High-yields savings account:
  • For savings above $3000+ as you build up to 1 year of basic living expense.
  • Money that you won’t need and can wait 3-5 business days to access if needed.

High-Yield Savings Account

Using the definition from Credit Karma,

“a high-yield savings accounts are bank accounts that earn you a higher interest rate for deposits than a traditional savings account… It means a better return on your money. The interest rate is what the bank will pay you for the privilege of keeping your money.”

Annual Percentage Yield (APY)

Both traditional and high-yields savings use an annual percentage yield (APY) to gain the business of the depositor.

In simple terms, APY is the rate that tells us how much we earn on our money sitting in their bank. APY uses compounding interest, so we earn interest on the interest that we previously received. That’s a major win for us.

APYs constantly change as the Federal Reserve increases or cuts interest rates. Most banks adjust their APY to stay in the fierce competition of all the online banks out there.

The Benefit of High-Yield Savings Account

There are many benefits to a high-yield savings account. The biggest benefit is a higher APY rate of ~1%-2%. Traditional savings account offer ~.01%, which is practically nothing.

Credit Karma provides a great example:

With the inflation of money increasing ~3% each year, we lose much more by leaving all our money in a traditional savings account. The value of our money stays stagnate but our purchasing power diminishes as the price of goods increases.

Other High-Yield Savings Facts

• All managed online, no brick-and-mortar stores
• Transfers can take ~3-5 business days
  • It’s accessible but not so easily accessible that you will spend it irrationally
• Some banks offer free access to ATMs
  • Read
• Some have monthly fees and/or requirements to maintain a minimum balance.
• Federally insured for up to $250,000 if you open at an FDIC-insured bank
• Can invest money in a money market or CD if you don’t need the money
  • Terms/contracts can range from ~3 months – 5 years

High-Yield Saving Account Options:

Make sure to do your research and find the best option for you. Here are a few sites that regularly update the best APY options available. Check them out:

• Nerd Wallet: “10 Best High-Yield Online Savings Accounts of January 2020”
• Bankrate: “Best Online Savings Accounts for January 2020”
• Investopedia: “Best High-Yields Saving Accounts for January 2020”

When to Use Your Emergency Savings Funds

Dave Ramsey has an interesting method for cash flow emergencies:

“if you can cut up to 10% off items in your budget to pay for something that comes up, then cash flow it. Otherwise, go for the savings.”

Let’s say that we have a $100 random expense. If we can cut 10% of one or multiple categories of our budget, then that is the route to go to cover the emergency.

For example, say we have $400 allocated to groceries, $200 to utilities, $300 to gas and $100 entertainment. If we can reduce each category by 10%, we would be able to easily cover the random expense.

We can play with taking more from one group compared to others. For instance, taking more than 10% from our entertainment and gas categories if we can temporarily adjust our lifestyle.

If we run through ALL line items in our budget and cannot cut 10% off, then use the emergency savings funds to cover the expense.

Hill-and-Valley Funds

Dave Ramsey also mentions having a hill-and-valley fund. It is one step down from an emergency fund. It’s there to help meet random monthly expenses.

I’ve seen other budgeters practice this by adding a “miscellaneous” category in their budget.

I suggest doing this at the beginning as you practice creating a budget that works for you. It took me some time to really hone in on my expenses, so miscellaneous expenses always came up.

With a dedicated category, it helped to bring peace of mind until I learned and applied more skills.

Automate Savings

The easiest way to make sure that savings are taken care of is to automate them. With so decisions and distractions nowadays, it’s one less thing to think about.

Direct Deposit

If you work for an employer, look into setting up direct deposits from your paycheck to your savings account. It’s very simple and easy to do.

All you need is your savings account number, routing number, and determine the amount or percentage you want to save. Your HR representative will take care of the rest.

Automatic Withdrawals

If direct deposit is not an option, you can set up automatic withdrawals from your bank. Have the money withdraw money from your checking account and deposit it into your savings account.

You can set a day when the money is taken out, such as the day after you get paid. It’s one extra step that only takes a few minutes to set up.

Make sure to read the terms and conditions, since all banks operate differently.

Use Apps

There are plenty of great personal finance apps out there. I do not have an affiliate link with Digit, so I’m recommending it to you because I’ve had personal success with it.

Digit

I remember using Digit when I first started. It was linked to my bank account and automatically withdrew money every few days. They have a special algorithm to make sure you don’t overdraft.

I loved how I could easily communicate with them through text. With a simple text, I could check my balance, make a transfer, increase/decrease my savings rate.

Hands-Free Savings

After seriously neglecting my digits account, I finally checked the balance and was ecstatic to see that I had $3000+ in my account! I owe a huge thanks to Digits Apps since I was completely hands-off. At the time, I know I would not have saved that money otherwise.

There is a $5 monthly membership that can be canceled anytime. I know I was hesitant to do it at first but as I look back, the cost was very minuscule.

Invaluable Lesson

It taught me the important lesson of savings and helped guide me until I could do it on my own. To me, that lesson was much more valuable than the $5/month or $60/year.

I suggest checking it out or researching other apps to help you on your journey. If it doesn’t serve you, you can always cancel and try something else. Digit is free for 30 days, then just $5/month after that.

Check Out Some More Apps:

• “Best Money Savings Apps” by Magnify Money
• “These 7 Apps Will Help You Save Money – No Matter How Tight Your Budget” by The Penny Hoarder

Wrapping It Up:

Stay tuned for part 3 which will cover different types of effective budget plans.

Use the information and experiment with what works best for you. You can mix and match pieces for a more personalized budget plan. Try it out for a few weeks/months and make improvements along the way.

As I like to say, take what you need and leave the rest. A successful budget is one that works best for you, period.

If you haven’t already, it’ll be a good time to subscribe so that you don’t miss the next post!

 [convertkit form=1205270]

What helped you to build an emergency saving?

Was there a time when your emergency savings come in handy in your life? Do you remember how it made you feel?

I’d love to hear your feedback, please leave a comment below! If you found this information helpful and know someone who could benefit, don’t hesitate to let them know. Show them how much you care and forward this on to them!

Thank you so much for sharing your time and energy with me!