Americans have largely been on one of two tracks since the beginning of the pandemic: Those who suffered income and net worth losses and those who gained wealth. A good example of this was the result of relief checks mailed out by the federal government. For some households, that money helped keep food on the table and utility bills paid. For others, their savings rates increased substantially — as high as 34% in April 2020.1
Since the economy has reopened and people are back to going out and spending money, savings rates have gone down. People who were out of work for just a few months may have relied on savings to get them through a challenging period. But given that it’s a new year, this is a good time to reconsider your savings habits. If you used some of the funds in your emergency savings account, draft a plan on how to replenish it.
Safety nets are important, whether it’s a well-funded emergency savings account or insurance coverage for your home, your vehicles, your health, your life and even your retirement. Any money you need to spend on emergencies can deplete not just emergency funds — but even your retirement savings. We can help you create a retirement plan that keeps your savings on track without threatening your long-term financial security. Contact us to find out more.
In 2020, a Bankrate survey revealed that less than half (41%) of Americans had enough savings to pay for a $1,000 emergency expense out of pocket. Moreover, more than a quarter (29%) reported facing a financial emergency that cost $5,000 or more.2
The following are some tips to bear in mind for funding emergency savings:
- You should have an actual cash account, not just an available balance on your credit cards. Borrowing money for a large emergency expense doesn’t get you out of hot water; it just delays and extends it.
- Consider using a basic savings or money market account that can be linked to your checking account for quick, emergency access.
- Avoid accounts that charge annual fees.
- Look for accounts that offer a nominal interest rate, for growth.
- You should aim for savings that would pay for a minimum of three to six months of expenses. If you have a family and only one income, you may want to save eight months up to a year, and be sure to keep paying health and disability insurance premiums so that you don’t dig an even deeper hole of debt.
- One good way to save regularly is to set up an automatic transfer of $100 or so a month, or from each paycheck, into the emergency savings account.
- Tap this account only for true emergencies, such as a major auto repair, catastrophic home repair, medical bill or job loss.
- Once you’ve withdrawn money from the account, make it a priority to replenish it as soon as possible (because when it rains, it can pour).
If you need to cut expenses to create a savings stream, consider giving up regular staples that are a bit indulgent. The obvious example is the proverbial $4 gourmet coffee, five days a week — that alone will yield about $80 to $100 in savings each month. Scale back one week out of each month for no-frills, necessities-only spending, and see how much that garnishes.3
Also, take a look at your broader spending habits to see if there are things you pay for but don’t use very often, such as gym fees, magazine subscriptions (both mail and electronic) and streaming services. If you pay for a channel you seldom watch, see if you can pay for one month only if there’s a show you’d like to binge each season. Another good tactic is to make it harder to spend your money. For example, delete your credit card from online shopping sites to make it difficult to mindlessly click your way into buying more stuff.4