The Truth About Emergency Savings Funds

Common wisdom says to build an emergency fund during the recovery period, but the truth of the matter is that many Americans are trying to get above water or at the very least maintain their current status. So, for those who aren’t quite in a place where they can save the recommended six months to a years worth of savings, here are some common sense tips on how to start an emergency fund:

1. Think Big in Life, Think Reasonable in Savings: Make a long-term savings goal and break that up into chunks. If the goal is to have a million in the bank by the time you’re 60, do the math and figure out how much it will take to get there. But, if the goal is just to have some money set aside for life’s inevitable obstacles, why not try making a initial goal of saving $500 in a year’s time. That’s roughly $10 a week.

2. Choose Wisely: Where one banks is an important decision, especially when building an emergency fund or any other type of savings account. Choose a bank that offers high-yield savings accounts. Some banks are offering as high as 2 percent, while some are offering a little less than 1 percent (more around .75 to .84 percent APY). Here’s a Web site with a nifty interest rate chart for different savings amounts.

3. FaceTime: Put your realities and dreams in your face. Put the reality of your situation and the dream in a visible spot. This advice is cliched because it’s true. Seeing both the truth and the goal makes them difficult to ignore. Put both in a visible place and once the debt begins to diminish (it will), focus on increasing the savings amount to help reach the goal.

The most important piece, be it $500 or $5,000, is to not touch it. Reserve that amount for emergencies and work to prevent those emergencies through careful budgeting.