Having an emergency savings account is critical for maintaining your financial well-being.
Many of life’s surprises come with a financial cost. But according to a recent survey, most Americans (61%) would not be able to cover $1,000 using some form of savings account.
Whether it’s a car accident, critical home repairs, or unforeseen medical expenses, being prepared with an emergency fund will help make sure you are prepared to successfully navigate what life throws your way. Having an emergency savings plan can also help prevent using high-interest credit cards, personal loans, or premature withdrawals from retirement funds.
“Three months of salary”
There isn’t an exact amount to put aside for emergency savings. Some experts recommend three months of your salary, in case you lose your job or have to stop working for a period of time.
Where should I put this money?
When starting your emergency savings, your first question might be “Where should I put this money?” While hiding cash somewhere around the house won’t necessarily fail you, you might do better to put it in a secure savings account that is separate from the main place you store cash (such as your checking account). This way, the money can earn interest, and you’ll be less tempted to use it for non-emergency expenses. A good rule of thumb is to treat your emergency savings account like a bill, contributing a realistic sum to it every month. Over time, you’ll find that your emergency savings have grown into a comfortable fund that can help you weather some serious financial storms.
What about a Traditional IRA?
A Traditional Individual Retirement Account (IRA) is a great option for emergency savings. The balance of your IRA is always available to you in case of an emergency and the average annual growth of an IRA is greater than the average interest rate for a simple savings account. So your money can grow faster in an IRA, leaving you with an even greater cushion in case of an emergency. Since an IRA is an investment vehicle, it does carry more risk than a regular savings account, so it’s important to weigh this fact against the greater potential for growth.