Ever since you were little, your parents hopefully told you to save, save, save. They taught you that conservative saving and investing was the key to a comfortable lifestyle years down the road. While this easy-does-it style of financial matters may have worked for your parents, it is probably too careful for the twenty somethings of today. Sticking money in a certificate of deposit is really no longer a viable option to ensure a stable financial future. Still, there are some very important lessons that we can learn from our parents and it comes in the form of an emergency fund.
Your emergency fund should generally consist a few months worth of savings stored away for any unforeseen life event. Emergencies can range from a job loss to unexpected car repairs, but whatever the case might be, your emergency fund should keep you from drowning in debt when a dire life situation emerges. The conservative saving approach from our parents should be our model when building up any emergency fund.
How much should you include in an emergency fund?
Most experts say that you should have between three to six months of savings in your emergency fund. With the economy as it is today, some financial planners even suggest that emergency savings should cover up to twelve months of expenses. More than likely, those of us in our twenties do not have enough obligations, like a mortgage, car payments, or children, to warrant keeping twelve months of cash on hand. The three to six month target should really be the amount of emergency savings for anyone in their twenties.
To determine exactly how much a month’s worth of expenses is for you, you will need to begin tracking your spending habits. Take out any unnecessary expenses such as a lattes, gym memberships, and nights out. When your life puts you in a sticky situation, these should be the first things to go. After you take out those expenses, find out how much money you spend every month. Multiply this number by three to six, and you get the target amount for your emergency fund. For help to track you expenses, look into online budgeting software such as mint.com.
How much should you save each month to fund your emergency account?
In your budget make sure that you save at least 10 percent of everything that you take home in your emergency account. Once you have amassed enough for three to six months of expenses, feel free to look at saving for other things like a car/house, nice vacations, etc. Just make sure that the money in your emergency fund is there, and ready just in case of unforeseen situations.
Where should you put your money?
Unfortunately, bank rates for traditional savings accounts are terrible right now. With this being the case, it is not recommended that you open up a savings account at your local bank. Instead, look into online bank accounts such as INGdirect or AllyBank. These online sites have APY’s from the one to two percent range. This may seem like a small rate (it certainly is based on historical standards), but it is much higher than savings rates at most brick-and-mortar banks.
The reason these online banks have such good interest rates is because they are online and do not need the same amount of staff member as local banks. With these online banks, you can even link these you accounts to checking and savings accounts at your local bank, making it easier than ever to get a decent rate without tying up your money (in something like a CD).
- You should have enough in emergency savings to cover 3 to 6 months of expenses.
- Save at least 10 percent of your take home pay (if possible) until your emergency savings is “full.”
- Look into opening up an online bank account that will get you an interest rate up to 5 times the national average.