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By Sean Donohue
Saving money for emergencies, or the proverbial "rainy day", is a financial necessity for every individual and family. The most popular, and convenient, vehicle for emergency savings is the plain vanilla savings account. Savings accounts are readily available at your banking institution and are great vehicles for accumulating emergency funds. The goal is not to earn a lot of interest on your emergency savings, but rather to keep it some place safe –which means it will be available when you need it most!
You may also want to consider saving your emergency funds in a money market account. Most banks and credit unions have money market accounts available that pay a higher interest rate than normal savings accounts; however, there may be minimum balance requirements and check writing stipulations with these money market accounts. Be sure to check with your bank or credit union for their specific policies.
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Another option for your emergency savings may be a money market mutual fund. These accounts can be set up through most mutual fund companies and they can typically be set up with check writing privileges just like normal savings accounts. A mutual fund company will also tend to pay higher rates of interest on their money market funds than do banks and credit unions. However, with a money market mutual fund, your deposits are not guaranteed by the Federal Deposit Insurance Corporation (FDIC) like they are with banks and credit unions.
While the above information is not rocket science, it is amazing the number of people that I talk to that don’t have an emergency savings account. Of those that do have accounts set up, many of them don’t have enough set aside. How much is enough, you ask? Most financial planners suggest that you keep 3-6 months of household expenses in these accounts, but individual situations will vary depending on what you feel comfortable with. Your goal should be to accumulate enough to be able to weather a temporary period of unemployment or cover some other unexpected event such as a vet bill or car repair. To be sure, products like disability insurance, unemployment benefits, and car insurance can soften the blow of an emergency, but having readily available cash to make up for shortfalls is very important!
The bottom line is that you need to build up a substantial savings account so that you won't have to use credit cards to cover unexpected, infrequent, or emergency expenses. Whether you choose to put away 3 months or 6 months worth of household expenses in a savings account or money market account, you must commit yourself to only using it for emergencies!
Along with establishing an emergency fund, finding ways to make your dollars go further can help you to free up money that you can use to save for retirement college educations, vacations, etc. This may mean clipping coupons, buying things in bulk, finding bargains at auctions, becoming an avid reader of the classified section of your local paper, or using other money saving ideas.
A final word on saving money: In today's "I have to have it now" world, people are, all too often, buying things that they can't afford. Commercials and credit card companies have convinced us that we can charge it now and pay for it later. However, buying things before we can afford them and running credit card balances is a huge barrier to our ability to build wealth through savings and investments. I firmly believe in delayed gratification, which means saving for something that you want to buy instead of putting it on a credit card. You can even do something creative like create an "I want it" expense in your budget and allocate money to it on a monthly basis.
Bottom line: Save and buy things when you can afford them and if you already haven’t, establish an emergency fund today!
***********************
Sean Donohue is the founder of <a href="http://www.militaryinvestors.com">MilitaryInvestors.com</a>, a website dedicated to providing free investing and personal finance information including saving, investing, budgeting, and mutual funds to military professionals and others.
Saving money for emergencies, or the proverbial "rainy day", is a financial necessity for every individual and family. The most popular, and convenient, vehicle for emergency savings is the plain vanilla savings account. Savings accounts are readily available at your banking institution and are great vehicles for accumulating emergency funds. The goal is not to earn a lot of interest on your emergency savings, but rather to keep it some place safe –which means it will be available when you need it most!
You may also want to consider saving your emergency funds in a money market account. Most banks and credit unions have money market accounts available that pay a higher interest rate than normal savings accounts; however, there may be minimum balance requirements and check writing stipulations with these money market accounts. Be sure to check with your bank or credit union for their specific policies.
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Another option for your emergency savings may be a money market mutual fund. These accounts can be set up through most mutual fund companies and they can typically be set up with check writing privileges just like normal savings accounts. A mutual fund company will also tend to pay higher rates of interest on their money market funds than do banks and credit unions. However, with a money market mutual fund, your deposits are not guaranteed by the Federal Deposit Insurance Corporation (FDIC) like they are with banks and credit unions.
While the above information is not rocket science, it is amazing the number of people that I talk to that don’t have an emergency savings account. Of those that do have accounts set up, many of them don’t have enough set aside. How much is enough, you ask? Most financial planners suggest that you keep 3-6 months of household expenses in these accounts, but individual situations will vary depending on what you feel comfortable with. Your goal should be to accumulate enough to be able to weather a temporary period of unemployment or cover some other unexpected event such as a vet bill or car repair. To be sure, products like disability insurance, unemployment benefits, and car insurance can soften the blow of an emergency, but having readily available cash to make up for shortfalls is very important!
The bottom line is that you need to build up a substantial savings account so that you won't have to use credit cards to cover unexpected, infrequent, or emergency expenses. Whether you choose to put away 3 months or 6 months worth of household expenses in a savings account or money market account, you must commit yourself to only using it for emergencies!
Along with establishing an emergency fund, finding ways to make your dollars go further can help you to free up money that you can use to save for retirement college educations, vacations, etc. This may mean clipping coupons, buying things in bulk, finding bargains at auctions, becoming an avid reader of the classified section of your local paper, or using other money saving ideas.
A final word on saving money: In today's "I have to have it now" world, people are, all too often, buying things that they can't afford. Commercials and credit card companies have convinced us that we can charge it now and pay for it later. However, buying things before we can afford them and running credit card balances is a huge barrier to our ability to build wealth through savings and investments. I firmly believe in delayed gratification, which means saving for something that you want to buy instead of putting it on a credit card. You can even do something creative like create an "I want it" expense in your budget and allocate money to it on a monthly basis.
Bottom line: Save and buy things when you can afford them and if you already haven’t, establish an emergency fund today!
***********************
Sean Donohue is the founder of <a href="http://www.militaryinvestors.com">MilitaryInvestors.com</a>, a website dedicated to providing free investing and personal finance information including saving, investing, budgeting, and mutual funds to military professionals and others.