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How to Grow Your Emergency Fund Over Time

Imagine this: your car suddenly breaks down on a busy day, or an unexpected round of layoffs turns your world upside down. What do you do?

Situations like these, while typically infrequent and unpredictable, can derail otherwise sound finances in a matter of seconds if you aren’t prepared. That’s where an emergency savings fund comes in.

Saving for the Serious: Overlooking a Necessity
When things are going well, the need for an emergency fund can seem trivial, and it may be tempting to put your extra money toward other goals or wants. However, unexpected costs are essential to plan for, and the best way to do so is by setting aside money in a dedicated emergency savings account. Here are three key reasons why:

  • Debt prevention. An emergency fund helps you handle surprises without using loans or credit to cover unexpected costs or make ends meet, so you’re less likely to accumulate debt during crises.
  • Financial preparation. Without an emergency fund, one major unexpected expense can cause a domino effect on your finances due to accruing debt or inability to make payments in full and on time. This could cause you to face concerns like damage to your credit or repossession of collateral used to secure financing.
  • Peace of mind. An emergency savings account is a safety net, ready to catch you when the unexpected happens.

Setting the Savings Bar
Life is full of evolving challenges and needs. Your emergency savings strategy should adapt to your current situation, too.

Typically, experts recommend having enough in your emergency fund to cover three to six months of living expenses. However, your savings strategy will likely change over time, particularly as your career evolves. By the time you near retirement, you should aim to build enough savings to cover one to two years of living expenses to compensate for potentially irregular income during retirement.

Remember that your own savings goals may vary based on your circumstances and finances. Account for factors like job security, income amount and stability, and debt obligations. When it comes to saving for emergencies, starting somewhere, even with small contributions and growing them over time will help steadily accelerate your emergency savings balance.

Selecting a Savings Safe Haven: Choosing the Right Account
Your emergency savings fund needs the appropriate environment to flourish. The best environment for your emergency savings can vary based on your goals and circumstances. Here are common emergency savings account options:

  • Traditional savings account. A reliable and low-risk option, standard savings accounts pay a small return on the account balance and are typically federally insured up to $250,000 per depositor, so your savings are safe. Though the return may be less than that of other saving vehicles, this is a sound option for those who just started saving.
  • High-yield savings account. Also generally insured up to $250,000, a high-yield savings account offers a better rate of return than a traditional one. Special requirements may be needed to earn this rate, such as maintaining a stipulated minimum balance.
  • Money market account. Money market accounts typically offer higher interest rates than traditional savings accounts while giving you easy access to your funds via debit cards, checks, or ATMs – though the number of transactions you can make may be limited. They’re protected by FDIC insurance up to $250,000 per depositor.
  • Money market fund. Unlike money market accounts, money market funds are investment tools. They offer higher earning potential and invest in low-risk, short-term securities. However, because they are investment funds and lack federal insurance, the overall risk is higher than traditional savings or money market accounts.

Savings Strategies and Tips for Success
You don’t need a massive initial deposit or significant ongoing contributions to grow an emergency fund. You just need dedication and forethought. Here are several tips to help you make tangible progress on building your savings:

  1. Don’t delay. Start saving immediately, even if you can only contribute small amounts. The sooner you start saving, the more time your money has to grow before the next unforeseen event.
  2. Set achievable goals. Being overly ambitious in the goals you set for yourself can lead to burnout, frustration, and loss of motivation. Be realistic about how much you can save for emergencies each month by creating a detailed budget and eliminating frivolous expenses to free up funds for savings.
  3. Keep an eye on APY. Savings tools that feature a competitive annual percentage yield (APY) will result in faster growth and higher earnings, boosting your savings.
  4. Make it effortless. Arrange for funds to be automatically transferred from your checking account to your savings account for a low-effort strategy that ensures savings consistency and prioritization.
  5. Reassess routinely. Every few months or when your financial situation changes, update your budget accordingly and look for opportunities to increase your savings contributions.

All Progress Is Positive
In a world where certainty is a luxury, building an emergency fund is not just a sound financial strategy; it’s a necessity. Growing robust emergency savings can take years of dedication, so remember that any progress – regardless of size – is a step in the right direction.

Let us be your partner in financial wellness. Contact us to see how we can help support and enhance your savings strategy or accommodate unexpected expenses.