Building an emergency savings account
When you’re in your 20s, your independent financial life’s just getting started, and with that comes certain responsibilities. Retirement savings may not be at the top of your list of priorities (although you should still be starting them as soon as possible), but emergency savings should be. Budgeting is great, but life is sometimes unpredictable, and so are its financial demands. These funds are intended to cover unexpected items that can’t reasonably be factored into your budget. Having this money available can greatly reduce stress during already trying times and can help you avoid accumulating debt by bridging the gap with loans.
What Makes Emergency Savings Accounts Different
Most of the time, money you’ve saved shouldn’t be just sitting around; investing it, or at least storing it in a high-interest account, will make your money work for you. Emergency savings aren’t quite like that. The whole point of having it is to be able to quickly and easily have access to fairly large sums of money. The funds need to be easily accessible, which means keeping them in an account with few restrictions and definitely not investing with them or lending any of it out. It may feel like a missed opportunity, and truthfully, it is. That’s why it’s important to set a limit for contributing to it. Save up enough to feel reasonably comfortable, then stop and start putting resources back into growth-oriented savings funds instead.
What They Should Cover
Non-insured medical, dental, and vision expenses, as well as funeral costs, are some that everyone should take into account, since they could affect just about anyone at any time. Beyond that, the specifics of your lifestyle come into play. If you own a car, account for possible car repairs. If you own a house, you might want a little extra to pay for a plumber’s visit. Pets? Put some money aside for vet bills. You may also want to account for the possibility of losing your job and income from it. The traditional rule is to aim for 6 months’ worth of expenses, though that may be a little ambitious at this stage in your life. If so, aim for a smaller amount initially and scale it up as your income grows.
What They Shouldn’t Cover
Try not to dip into your emergency savings for anything you don’t strictly need, like impromptu date nights or a night out after a bad day. You might not intend for it to be anything more than a one-time thing, but it can quickly become a habit that will drain your savings dry and defeat the purpose of having them in the first place. Even if you really feel like you need to impress someone or need the boost, don’t give in. If you can’t fit the expense into your existing entertainment or disposable income budget, try and find a free or low-cost alternative instead.
How to Save for One
If you’re starting up an emergency savings fund, the best way to do it is to do it quickly. Treat it like a debt you want to aggressively pay down. The sooner you have this cushion in place, the more effective it will be. This means that until you have a respectable amount built up, it should take priority over most other discretionary spending. You don’t need to cut all the fun extras out of your life entirely, but being more frugal for a little while can give you more to put in your emergency savings fund. The sooner you start, the sooner you’ll finish!
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