Having cash in savings can help you manage unexpected expenses without draining your regular bank account or accumulating a balance on your credit card. This money can be utilized in a short time if needed.
Why You Need an Emergency Fund
Short-term savings can be a financial lifeline when you face unexpected expenses or experience a drastic change in your income. For example, you may need to rely on savings if you are laid off from your job or your water heater breaks down. Additionally, having short-term savings can give you the freedom to spend your paycheck sometimes because you know that the emergency fund is available if you need it.
Note: The U.S. Federal Emergency Management Administration recommends going beyond an emergency fund with a financial first aid kit that gathers all your financial information in one place. Creating this type of kit protects your important financial details and encourages you to review your current financial situation while preparing it.
Action Required: Opening Goal-Oriented Savings Accounts
When opening a short-term savings account, it may be helpful to take a goal-oriented approach. You can open one savings account for your emergency fund and a second savings account for your “fun” money.
First, determine how much you need to save each week, month, or year to achieve your goals.
Let’s say you want to save $3,000 for emergencies and $1,200 for fun within one year. You’ll need to save $250 per month in the emergency fund and $100 per month in the fun savings account. Saving for emergencies is important in case unexpected expenses arise, so you might plan to save the full amount of $350 per month for eight months in the emergency savings, and then in the ninth month, transfer the deposits from the emergency fund to the “fun” savings account for the rest of the year.
You can boost your short-term savings using some simple tricks:
- Complete deposits to your savings accounts with each paycheck.
- Have your cashback credit card rewards deposited into your savings account.
- Utilize unexpected funds (like tax refunds and bonuses, etc.) to fund short-term savings.
- Track your spending to identify expenses you can cut back on to save more money.
- Create a savings tracker to monitor your progress:
| Goal | Amount Needed | Monthly Commitment | Total Saved So Far | Months Remaining |
|---|---|---|---|---|
| Emergency Fund | $3,000 | $350 | $2,800 | 0.5 Month |
| Fun Fund | $1,200 | $350 | $0 | 3.5 Months |
A simple savings tracker can help you stay focused on your goal.
Opening Savings Accounts
After setting your goals and plan, identify and open your accounts. Take the time to compare the options available. Pay special attention to:
- Whether a regular savings account or a high-yield savings account makes more sense.
- Interest rates and annual percentage yield.
- Monthly fees.
- Minimum deposit requirements and minimum balance requirements.
Consider the features that matter to you as a saver. If the highest annual percentage yield is important to you, for example, you may want to choose an online bank instead of a traditional bank. Online banks often offer more competitive rates than traditional banks, even in low-interest-rate environments.
Note: Consider the convenience factor. When opening a short-term savings account for your fun fund, for example, you might want to keep it at the same bank where you have your checking account. This way, you can link them together and easily transfer money between them if needed. You might choose to keep your emergency fund at a different bank, on the other hand, if you want to avoid any temptation to dip into it.
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There are many reasons why you need to have an emergency fund, as well as saving for those short-term times when you want to treat yourself. In addition to savings accounts, you can also use certificates of deposit to grow money that you don’t plan to use immediately. Starting a ladder of certificates of deposit, for example, can be a great way to earn interest while saving for long-term goals.
Learn more about choosing a short-term savings account:
- Best interest rates on savings accounts
- Best banks for savings accounts
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Federal Emergency Management Agency. “Emergency Financial First Aid Kit (EFFAK).” Page 1.
Source: https://www.thebalancemoney.com/how-to-start-an-emergency-fund-1389000
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