Emergency Savings Strategies to Improve Financial Security
No one wants to think about all the things that can go wrong in the course of modern life – and they really don’t want to think about how to pay for it. But an emergency savings account is a cornerstone of financial wellness.
Because the cost and timing of a future emergency is undefined, it’s easier for people to put off saving for it. In addition, the monetary goals for emergency savings – typically the equivalent of three, six, or more months of income – are so large that many people feel it is unattainable. The key is progress, not perfection. Try these strategies to start building your emergency savings today.
Recognize the symptoms of an emergency savings gap and adjust budgets
If you find yourself using credit cards or debt for emergencies, you might think what you need is debt consolidation or a line of credit. In truth, this is a symptom of not having that emergency cushion to fall back on. You need to deal with debt, but simultaneously, start setting money aside for the next emergency. Think of it as pre-paying. This may mean reducing spending or otherwise adjusting your finances. Talk to a financial advisor to make sure your adjustments are sustainable and balance short- and long-term needs.
Start small and celebrate success
When a task seems overwhelming, it’s hard to get started. In the case of emergency savings, it’s important to remember that any progress will help. You don’t need to save $1,000 in one go. Instead, break down your goal into smaller, more attainable pieces, and take the time to celebrate each milestone as you reach it. Have a plan in place for positive surprises too – like setting aside half of unexpected windfalls for emergencies. Step by step, you can build financial resilience.
Use automation to your advantage
One of the most valuable tools for building emergency savings is automation. The more things you have to do and steps you need to take to save money, the less likely it is to happen. Set up automatic transfers from your paycheck into a designated emergency savings account (it’s really important that it be a separate account). Your HR or payroll department can help. Or set up inter-account transfers on your own using a banking app. The less you have to think about saving, and the more it happens automatically, the better.
Factor in insurance as a part of your emergency plan
The amount you’ll need to save for an emergency can be reduced if you have other sources of income for worst-case scenarios, such as being unable to work. Disability insurance is the key here. Many employers offer long-term disability insurance as a benefit, but an investment in short-term disability insurance can greatly reduce the amount you’ll need if you become injured or ill. Insurance should be part of your emergency plan, too. There are many types at different price points, which can make choosing a plan confusing; your financial advisor can help you choose the right coverage.
Align your emergency savings plan to your situation, and be specific
Finally, take the time to get your head around what an emergency savings plan should accomplish for you specifically. Do you have kids? A mortgage? A car payment? The more complex your situation and the more expenses you have, the more you need. A simpler situation will require less emergency savings. Either way, knowing is the first step toward achieving better financial security.
Saving for emergencies can be daunting. At Alerus, we want to do what we can to make it easier to take this important financial step. Our Alerus emergency savings account rewards savers with a higher interest rate if they contribute to their account regularly, and our advisors are ready to help you sort through the details of budgeting, insurance, and goal setting. Talk to an Alerus advisor today.