Tips and Tools for Building a Better Emergency Fund
Life can be unexpected. As a result it’s important to prepare yourself — and your finances — for the worst case scenario. In the latter case, one of the best ways to ensure that an unforeseen expense, job loss, or other setback doesn’t become exacerbated is to have an emergency fund on hand.
That’s probably advice you’ve been told before. However you might not have heard about some of the different tools you can use to calculate, grow, and get the most out of your emergency savings. Let’s take a closer look at what you need to know about building a better emergency fund.
How to Calculate Your Emergency Fund
Totaling your expenses
Before you can set a target amount for your emergency fund, you’ll need to figure out how much you spend in a given month. More specifically you’ll want to look mostly at your “must-pay” bills that you would need to cover regardless of your financial situation. This would include things like rent/mortgage payments, car payments, insurance premiums, groceries, gas, etc. For non-monthly recurring expenses or fluctuating bills like utilities, you can either average these costs across 12 months or include the largest possible number in your calculations. Finally it’s also a good idea to keep a list of subscriptions, recurring fees, and other places you’d immediately need to cancel or cut back on were the worst to happen.
Considering your situation
Once you arrive at your monthly spending amount, you’ll want to determine how many months worth of expenses you should keep on hand. Typically it is advised that an emergency fund contain enough money to cover you for three to six months, although this could depend on your personal situation. For example a single person might not feel the need to keep as much cash on hand as a family would. Similarly flexibility and risk tolerance will also be major factors in how conservative you make your emergency fund.
Mint is a popular budgeting tool that allows you to link your various bank accounts to view recent transactions, balances, and more. Because the service keeps track of your spending across a number of categories, it could prove to be a great place to start when you’re calculating your monthly expenses. Of course its budgeting capabilities can also come in handy as you start setting aside money to build your emergency fund (but more on that in a bit).
Similar to Mint, Personal Capital also allows users to connect multiple financial accounts in order to monitor them all in one place. Although, on the whole, Personal Capital is more investment-focused than Mint, it still offers budgeting tools and spending insight that can help you craft your emergency fund plan. In fact, you may even be greeted by a message congratulating you on having enough cash on hand once you meet some popular emergency fund parameters.
How to Build Up Your Emergency Fund
Perhaps the best way to help you start building up your emergency savings is to leverage automated transfers. By arranging to have money moved without you having to do it manually, not only will you reduce the risk of forgetting to do it but will also help instill the habit. In addition to many major banks offer some sort of automated transfers, we’ll discuss some other useful tools below.
Set aside “found money”
As you continue to work toward reaching your emergency savings goal, another way to speed up the process is to set aside “found money.” What do I mean by that? This could be bonuses you receive from work, cash gifts from friends and family, or even something like a tax refund. It could also be expanded to include cash back you earn from apps like Dosh and Ebates/Rakuten or credit cards rewards. While it may feel like a sacrifice to put your “fun money” into your emergency fund, the peace of mind you’ll get once you’ve hit your target number will be well worth it.
In some ways, Clarity Money could be compared to Mint as it does offer some basic budgeting and spending monitoring tools. However the feature I wanted to focus on is their automated savings account. Here users can elect to automatically transfer funds from a checking account on a set schedule, allowing them to painlessly build up their fund. Between this function and the aforementioned budgeting tools, Clarity could be a smart overall option for building and managing your emergency fund.
If you’re looking for a service that will literally make saving fun, Long Game might just be for you. This clever app rewards users for making regular savings contributions by granting them coins they can use to play games and potentially win money. That might sound like gambling but Long Game only allows you to earn coins, not buy them and your savings are never at risk in any of these games of chance. As a result this unconventional but surprisingly addictive app could prove effective for helping you build up your fund.
Unlike the above tools where users select how much they’d like to save each week/month, Digit‘s claim to fame is that it leverages artificial intelligence and algorithms to help users save. Not only will Digit assess your spending and automatically make transfers to savings for you but will also allow you to set additional savings goals and stay on top of your balances via SMS alerts. The only downside to Digit is that the service costs $2.99 a month after a free 30 days trial. Still, if it helps you reach your emergency fund goal, this fee may just be worth it.
Making the Most of Your Emergency Fund
High-yield savings accounts
While most consumers likely have a savings account with one of the major banks, often times these options pay very little interest to account holders. That’s why you may be better off moving your emergency money to a high-yield savings account like those offered by some online-only banks. In many cases these accounts will allow you to earn 100 or even 200 times the amount of interest you’d get from a traditional institution, enabling you to grow your funds without having to do a thing.
Certificate of Deposits (CDs)
Another option for making some money with your emergency fund in waiting is a certificate of deposit — commonly known as a CD. Typically offered with terms from three months to five years, CDs can best be described as a timed safe that you place your money into until it opens up after the term period is up. Depending on the institution, the term length, and other factors, the interest you earn from CDs could be even greater than certain high-yield savings accounts. On the other hand, one downside to CDs is that there may be complications should you need to pull your money out early. Often times this means returning a portion of the interest you earned but other penalties and fees may also apply. For that reason, be sure to check your issuer’s policies before placing your emergency funds in a CD.
Why not invest?
Lastly, it’s worth noting that investing your earmarked emergency funds is not advisable. That’s because, due to the nature of the markets, there’s a chance that your investments could lose value. As a result, you may end up in an unfortunate situation where your emergency account isn’t as well-funded as it once was. So while they might not deliver the same returns as riskier investments, it’s better to keep your emergency savings safe than to be sorry about it later.
One of the newer offerings on this list, Dyer News contributor Kyle Burbank recently offered praise for SoFi’s hybrid account. By “hybrid” I mean that SoFi Money functions similarly to both a checking and savings account, one that currently offers 2.25% APY. This could actually be a big perk when housing your emergency fund as you’ll be able to earn interest when your money is not in use but will be able to access funds quickly (via debit card or paper checks) should the need arise.
You’re likely familiar with Discover thanks to their popular credit cards. As luck would have it, they also have a banking wing that offers savings and checking accounts as well as CDs. At this time Discover’s savings accounts don’t have the absolute highest APYs (2.10%) but they do offer cash back checking where users can earn 1% back on debit card purchases. Plus, as mentioned, the institution has a number of CD options, making them a potential home for your multi-pronged emergency fund approach.
Marcus by Goldman Sachs
Not only does Marcus by Goldman Sachs offer a high-yield interest account but they also happen to own another tool on this list: Clarity Money. Now Clarity users can elect to turn their automated savings account into a Marcus account. Although doing so won’t affect the savings plan you have but will allow you to earn a current rate of 2.25% APY on your money. In other words, this plan could be the best of both worlds.
There’s no overstating how essential having an emergency fund can be in protecting your finances. Thankfully these days there are several tools one can use to not only reach your savings goal but also do so at a faster clip. Between these helpful tips and useful tools, you’ll be able to build up your emergency fund — and hopefully never have to use it.
Also published on Medium.