Banks and Financial Advisors often talk about an Emergency Fund Savings Account, also known as an emergency fund, as something required for every individual. Is it really required? Are there other financial vehicles that can accomplish this? In this review of Emergency Fund Savings, I will first define what is meant by an emergency fund, secondly how much you should have, how to start one, and where to potentially keep those funds. I would encourage you read until the very end as I also give my personal thoughts on an emergency fund.
What is an Emergency Fund Savings Account?
In a general sense, the definition of emergency fund is in the name. Emergency fund Savings is a savings account for all “emergency” issues. Notwithstanding, this can include any all situations where you need immediate access to cash funds without having to liquidate any physical assets. Some quick examples of when you may need cash immediately, would be a car wreck, hospital visit, roof repair, major appliance issue, job loss or family emergency.
Another way to look at an emergency fund is a “peace of mind” fund. An account where you have stored funds to use in case of something unexpected. An emergency fund savings is always better than dipping into the available credit on that high interest credit card. The savings account, albeit not earning much, is your money. Using a credit card is using the banks money at a high interest.
How Big should your Emergency fund Be?
This is the question, right? If we supposedly need the emergency fund savings, how big does it need to be? Consequently, there are multiple schools of thought on this one. Some advisors say 3 months, some say 6 months, others even say 12 months of expenses.
This will really depend on your lifestyle and family stability. I also believe that it will depend on what kind of business you are in. If you are a two income household with no children, then maybe only 3 months would be plenty, however if you are a one income household with multiple children and working in a full commission role, maybe 12 months would be better. The amount of money in your emergency fund depends on many factors, and absolutely cannot get a rubber stamp of approval, saying you need 3 to 6 months only. I would suggest working with your financial advisor to create a plan.
How to Start your Emergency Fund?
If you, like many others in the world who don’t typically plan for emergencies, the idea of starting an emergency fund savings account sounds a little daunting. There are multiple ways to start this account though. First, I would suggest opening up brand new account. This can be an online account or another account at your local bank. There are many online savings account offers that actually give you a higher rate of return than local banks, make sure to look online. Second, we must find a way to fund that account given that you currently have expenses and may be living paycheck to paycheck.
Auto Save
In my post, ‘Savings and Investing’, I discuss ways to auto save so that you don’t actually realize the money is being stored away for you. Auto saving is a great way to build up savings, however if the number of bills do not seem to equal the income, this can be challenging. We need to think about lowering expenses.
Know Your Expenses
In order to lower expenses, we must first create a budget. I know that’s a “dirty” word in many households, but it’s very easy, plus there are phone apps that can help you do this. A budget is extremely important to understanding how much you spend versus how much you save. Many times I’ve helped individuals create a budget and afterwards they said, “I didn’t know I was spending that much on going out!” Have you heard the term, “ignorance is bliss”? Well it’s not bliss if you are broke!
Once a budget is established, you can see ways to decrease expenses. That extra money can fund your emergency savings account. I understand that this is a very basic example. The takeaway is that I guarantee you are spending more than you need to on something in your household budget. Would you like to be free of the debt baggage you carry, and maybe even find financial freedom? What would that look like to you? If you did not have to even think about how much something cost? Financial stress is one the biggest causes of family and health issues in the world.
Where do you keep the Emergency Funds?
First, let me start out by saying that I am not a financial advisor and I do not work for any of the financial institutions that may be suggested. The banks will tell you that your emergency funds should be in one of their institutions. American Express is offering 0.60% APY at the time this article was written. Citi is offering 0.70% APY, so is Capital one. Ally bank is offering 0.60% APY as well for high yield savings accounts.
According to Inflationdata.com, the average rate of inflation has been 3.22%. Quick math shows me that on an annual basis, if we keep our money in a high yield savings account, we actually LOSE 2.52% on our money. This assumes averages and savings yields stay consistent. My purpose here is not to confuse anyone, but simply to educate. I have a savings account and it earns me roughly 0.50% APY. I want to make sure that when deciding on where to store funds you realize all the potential issues.
Now, is there a better way? Perhaps. I recently read a book by Brent Kesler and Chris Naugle, ‘Mapping out the Millionaire Mystery’ and would strongly suggest reading it. The concept here is using a form of life insurance help someone create their own banking system. Comparatively, this is not a new concept and has been around for about 200 years. R. Nelson Nash discussed this in his book, ‘Becoming your own Banker’. Both of these books are incredible. They opened my eyes up to the general banking system and how individuals can become their own bank.
Conclusion
Is an Emergency Fund Savings Account necessary for you? Unfortunately, I cannot answer that. I don’t know your particular situation. Is having the ability to access quick cash very important? Most financial advisors would probably say yes. They might say everyone needs an emergency fund and it should be in a savings vehicle that is easily accessible. I do believe that you need to have access to cash which in an emergency, can be used quickly. However, is a savings account the best vehicle? There is definitely debate on that.
My goal is to offer options and make sure, to the best of my ability, that you have as much information as possible to make the best decision. Financial education is the only way that we can all make better business decisions. Whether that is the business of business or the business of life. Thank you for reading, please subscribe to my blog and comment below.
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