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We’ve gotten a few questions recently about emergency savings accounts. What are they? How are they different from other savings? Where should I keep my emergency savings? Etc.

So today we’re going to answer all your emergency savings account questions and fast-track you to building an emergency fund of your own.

Everything you need to know about emergency savings accounts in 1 post!

Your Quick Start Guide to Emergency Savings Accounts

Consider this detailed Q&A your quick-start guide to emergency savings 🙂

How are emergency savings different from any other savings and investment accounts?

As the name implies, emergency savings are reserved just for emergencies.

Your car breaks down, and if you want to get to and from work, you need to pay $800 to fix it = emergency.

You have a potentially amazing date coming up and you found the perfect dress = not an emergency.

What if you move to a foreign country for a new job, but when you get there, the company tells you they have restructured, your position has been eliminated, and your employment contract has been voided. You now have no job, no place to live, and you can’t legally stay in that country for more than 90 days. Emergency! Fun fact: that actually happened in 2016, and I spent my emergency fund moving back to the US.

What about a last minute invite to Cabo for Spring Break? Nope, not an emergency. Btw, at Savings and Sangria, we fully believe in seizing these opportunities, that’s why we keep a separate Dream Fund to finance all the cool things in life. But the point remains: cool opportunity ≠ emergency.

Where should I keep my emergency savings?

When would it best suit your schedule to have an emergency happen? Life doesn’t care. Emergencies happen when they happen, so your money needs to be ready to spring into action without notice.

This means you can’t invest your emergency savings. Investments have to be sold before you can access the money. So you need your emergency money stored “liquid”, which is financial-speak for “easily available”.

The best place to keep your savings liquid is in a savings account.

This is different from your checking account. Your checking account is where your money flows in and flows out almost daily. Your paycheck goes in, and payments go out to rent, Netflix, the electric bill, etc.

You don’t want your savings mixed up in all that coming and going. It’s too easy to see a growing balance in your checking account and think you have plenty of money, so why not go out for dinner an extra night this week?

Keeping your emergency savings in a separate savings account keeps it out of sight and out of mind until you really need it.

Now, if you want to be extra smart about your emergency savings, choose a “high-yield” savings account. High yield means they pay a better-than-average interest rate, so your money will be able to grow a little on its own while you go about your life.

How do I open my emergency savings account?

If you don’t already have a savings account, you’ll want to open one. And if you do already have a savings account, you’ll want to quickly ask yourself a few questions to make sure it’s the best savings account for you.

The account rules vary by bank. Here are the questions you need to ask before you select an account:
  • What is the interest rate? Interest rates are always changing. As of the date of this post, 1.55% APY (annual percentage yield) is a good rate for a savings account.
  • Is there a minimum balance? Many high yield savings accounts require that you keep at least $x in the account at all times. If your balance drops below that amount, you’ll be penalized, usually with a fee. Now, this is no biggie if the minimum is $1. But if the minimum is $500, that could be a real problem. For your emergency savings, go with a very low minimum balance, even if that means you can’t get the best interest rate.
  • Is there a minimum deposit? Some banks require each deposit to exceed a certain amount. Maybe it’s not worth the bank’s time and resources to accept your $2 deposit once a week, so they might have a $25 minimum deposit amount, for example.
  • Is there a monthly fee? That’s right, some banks charge a fee for managing your savings account. In this day and age, there are plenty that don’t have any fees, so there’s no reason to stick yourself with one that does.

There are hundreds and hundreds of different savings accounts you can open. And almost every bank offers at least one high-yield savings account.

The easiest way to sort through all that is to check comparison sites, like SmartAsset. You’ll be able to compare the highest-rated savings accounts and see the APY, minimums, and fees.

When you find the account that ticks all your boxes, just look for an “Open Account” button, which will take you directly to your chosen bank’s site. And you can open your new account online in just minutes.

What do I need to provide to open my account:
  • Your contact info (address, phone, email)
  • ID (driver’s license, passport, and/or social security number)
  • Your checking account information so you can transfer money from your checking to your new emergency savings account
  • Some banks ask for employment info or other demographic information for their records

Feel free to read the rest of this article before you run off to open your new account though! We have more need-to-know info for you 🙂

Be financially prepared for emergencies with a solid emergency savings fund

How much should I save in my emergency savings?

The amount of money you keep in your emergency savings depends on your personal preferences and where you are in life.

In college? You probably don’t have a ton of financial responsibilities. So $1,000 is a good place to start. Most routine emergencies for college students cost less than $1,000 to get through.

Entry-level life? Once you’re done with school and are in the working world, you want to start thinking of your emergency savings in terms of covering your expenses for a certain period of time. Like if you lost your job (a pretty common emergency), could you find a new job within a month? If so, you want to have enough in your emergency savings to cover all your expenses for a full month.

But maybe you think it would take longer (or you’re just a bit more conservative and want a bigger safety net. If that’s the case for you, shoot for 3 months.

Mid-level life? Save enough in your emergency savings to cover all your expenses for 3-6 months.

Upper-level life? Save enough to cover all your expenses for 6-12 months.

High life? Save enough to cover all your expenses for a year.

The thinking behind increasing the time frames as you progress through life is that it’s harder to replace an upper-level job than an entry-level job. The higher up the ladder you go, the more scarce jobs get. And if you don’t want to take a step down the ladder, you could be searching for months to find the right upper-level life fit.

Shouldn’t I just keep all my savings in my emergency savings account?

No, definitely don’t keep all your savings in your emergency savings account. This is a really common mistake, especially for new savers. And it will cost you!

Remember how we said 1.5% APY is a good high-yield savings account interest rate right now? Well, that might be a good rate for a savings account, but it’s a terrible rate compared to other investments. For example, over the last year, the stock market’s S&P 500 Index has earned 14.51%.

How much does that interest rate matter?

Let’s say you start with $100. And commit to saving $100 every month for the next 10 years. In a savings account earning 1.55%, you’d end up with $13,088 ($12,000 you saved + $988 in interest).

And if you invested that money in the market instead? Let’s assume an average annual return of 10% (because this past year’s 14.51% is really high!). At the end of 10 years, you’d have $20,755 ($12,000 you saved + $8,655 in interest). You’re saving the same $12,000 over 10 years, but you’re earning $7,667 more by investing.

Here's why you shouldn't keep all your savings in your emergency savings account

That’s why you don’t want to keep all your savings in your emergency savings account.

Remind me again why we’re putting any money in a savings account when the market is doing so much better…

With math like that, you might be tempted to skip the savings account completely and jump into investing in index funds right away. But don’t.

Remember, you don’t get to choose the timing of your emergencies. You need your emergency savings liquid so you can use them whenever your emergency pops up.

If your money is invested in the stock market, you need to sell your stocks or shares before you can access your money. So your money isn’t immediately available to you if it’s invested.

The real problem with this is that the market isn’t always doing so well. In 2008, the year the great recession hit, the S&P 500 was actually down 37%! Unlike your savings account, where your money is safe (federally insured up to $100K, in fact), investments are never a guarantee. You can lose money by investing in the stock market. And you just can’t take that risk with your emergency savings.

If the stock market is so risky? Why invest at all?

So now you’ve seen both sides of the stock market: great returns and losses.

Are the great returns worth it? Absolutely!

The market is cyclical. It will go up and it will go down. But it will always come back up (if it doesn’t our society has collapsed, and we all have way more to worry about than our investment portfolios). So as long as you don’t need the money to be accessible at a moment’s notice, and you can wait out any market downturns, the stock market (index funds in particular) are a great investment.

So to reiterate:

Emergency savings → keep safe and liquid in a savings account

Other savings → invest for the long term in Index Funds

How do I build my emergency savings account?

Ok, so you understand why we’re keeping our emergency savings in their own savings account, and you know how to open an account online in minutes. Now let’s talk about how to actually build your emergency savings.

I’m going to let you in on my secret to guaranteed financial success…

Ready for it?…

Automatic transfers.

Ok, so it’s not a super sexy answer. But that’s probably why so many people overlook it and struggle their whole lives to build their savings. Thanks to automatic transfers, I’ve been able to build an emergency savings, fund an investment account, buy 2 investment properties in SoCal, and realize my dream of living abroad (twice since the first go didn’t work out so well!).

How does it work?

When you open your new emergency savings account, you create an automatic transfer to move a certain amount of money from your checking account to your emergency savings account every payday. Maybe you decide to set up an auto-transfer of $50 every 3rd and 17th of each month (if you’re paid on the 1st and 15th, that will give your bank a couple days to receive your paycheck, but won’t give you enough time to spend it all!).

This automatic transfer forces you to save. You don’t have to remember to transfer money to savings. And you can’t screw yourself over by spending the money before you have a chance to save it, because it will already have been whisked away out of your checking account and into your savings account.

It’s like magic.

And once your emergency savings account is fully-funded (meaning you’ve reached your goal of saving $1,000 or enough to cover 3 months’ expenses, or whatever), you can cancel that auto-transfer and add that money to your retirement and/or dream fund auto-transfers.

Ok, we just kinda threw retirement and dream funds into the mix, there. If you want to learn about our 3-Barrel Approach to Saving that covers emergency savings, retirement investments, and dream fund savings/investments, read our post on the 3 Accounts Every Woman Needs to Grow Her Fortune.

With your autotransfer system set up, you can just kick back and review your monthly bank statement to watch your money grow. If you’re totally new to bank statements, check out this helpful Bank Statements 101 Guide from GoBankingRates.

What if I don’t have any money to save?

This question comes up constantly. You want to save, but you’re already stretched thin. How are you supposed to save with no extra money left for savings?!

In that case, you only have two options:

  1. spend less and/or
  2. make more

That might sound harsh, but it’s actually kinda nice because it’s so straightforward. There’s no crazy scheme to get around this. You simply need to spend less and/or make more.

If you haven’t already done this, make a list of your expenses (btw: this process is also covered in our 5-Day Financial Fix Challenge). You’ll usually find that you can reduce, or even completely eliminate a couple things. Here’s a list of smart ways to cut expenses to help you get started.

And if you’ve cut spending as much as you can (or as much as you’re willing to), you just need to make more money.

Lucky for you, you live in the age of freelancing and making money online. There are tons of ways to add more cash to your life.

Check out some of our recent money-making posts:

 

Did We Answer All Your Emergency Savings Account Questions?

If you have a question that wasn’t answered, or if you have additional emergency savings tips, leave us a comment!

Cheers! From Savings and Sangria

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