Why You Need An Emercency Savings

You Need This Before You Do Anything Else!

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If you’ve been reading my blog closely, you’ve noticed the last few articles I’ve written have all mentioned setting up an emergency savings account. Today, I want to share with you why you need one before you save for (or buy!) anything else.

Why This Topic?

From my own experience, I’ve noticed very few people around my age seem to have one of these. If something were to happen like their car breaking down, scholarship money not being received, or getting fired from their job…they would have nowhere to turn except hoping their parents might help them out. For many, their parents are the emergency fund, and that’s fine for now. But what happens for these people when their parents can’t/won’t help them OR they graduate college and need to begin figuring things out on their own?

Ask yourself these questions:

  • Could I cover an unexpected expense of $500-1000 if I needed to? (Average cost of a car repair)
  • If yes, would that unexpected expense kill my budget for a month, two months, or more?
  • Would an unexpected expense keep me from being able to pay other obligations?
  • Would I resort to having to put that expense on my credit card?

If you answered yes to any or all of these, you definitely need an emergency savings. An amount of money set aside to easily dig you out of situations when you need it.

So What Is An Emergency Savings?

This one should be pretty obvious. An emergency savings is a separate savings account from your primary savings, checking, retirement accounts, and all other monetary accounts you have. It is set up to be used only in case of an emergency. You never spend anything out of this unless you absolutely HAVE to. This isn’t for when you spent too much money in PB last night.

Why Do You Need One?

Even if you do have coverage from your parents right now if an unexpected expense were to pop up, you’re going to thank yourself in another few years if you start learning to build one now. At some point, your finances will all (hopefully) be on you. If you learn to put money aside for emergencies now, you may end up with more money to put towards other things down the line. My own personal emergency savings is set up to cover me up to a year without working and covers living expenses, bills, gas, car payments, food, fun. I could honestly take a year off and change nothing about my style of living. Pretty nice, right? I want you to have that kind of security too.

So What Is Supposed To Be Used For Then?

Primarily, people set these up to cover them in the event of job loss. If you started working full-time and lost your job for whatever reason, an emergency savings is traditionally used to cover a few months worth of living expenses while you search for a new job. It’s like insurance in a way. You hopefully won’t need it. But you’ll sure be happy you’ve got it when/if you do.

However, this has been expanded by financial experts recommendations to also cover smaller emergencies such as a car repair, family issue, or whatever else is truly a critical emergency and you need money. Your pet monkey BoBo gets taken by kidnappers and holds him for ransom. You need cash. You get it.

How much do I need to save? The 3-6 Month Rule

So here is something that is really tricky to answer. Honestly, it depends on you. Someone working full-time and supporting a family probably needs more than a college student looking to learn to build their financial chops.

A broad guideline from many experts is three to six months’ worth of the money that you need for all non-discretionary expenses (such as health insurance, your rent, food, other essentials to live on). That way, you have enough that if you were to lose your job, you’d be able to continue paying your bills while you looked for another one.

The Problem With The 3-6 Month Rule

This assumes no variability. Some people go into professions that are more secure than others. Someone working for a Fortune 500 company has a lot more job security than a freelance photographer lets say. The more secure your job is, you could save maybe just 3 months. If you’re going to be working in a job that is less secure, you’ll probably wanna stash away a bit more in case something happens.

What Financial Experts Recommend: F**k 3-6 Months. You need more.

Many financial experts now recommend having 8-12 months of salary stored away. This also deals with people’s tolerance for risk. If you’re not someone who worries as much, you may me comfortable with only 3 months living expense stored up. Someone like me who is more risk averse when it comes to this subject, has saved an entire year up*.

Financial experts also recommend having some money saved for small expenses or emergencies such as car repairs, etc..

(*Side Note: my savings is accounting for a full year on my estimated living expenses after college. If you really wanna know how much I’ve saved, you can ask me personally or shoot me an email on the contacts page).

How Much You Need (as a college student) – Start With $500-$1,000

Now, I totally realize saving tens of thousands is hard to do. Although it is possible. BUT, for many readers this may seem overwhelming. So start small. Saving $500-$1,000 would be a good place to start. It’s where I started.  Keep it for when something happens and replenish it if you have to use it.

This small sum can get out of a lot of tricky situations. It’s enough to pay a speeding ticket, average car repair, a forgotten bill, losing your wallet in Vegas, and most other issues that may pop up for you.

Saving just $1,000 would make you better off than most American’s

Read this link: http://www.marketwatch.com/story/most-americans-have-less-than-1000-in-savings-2015-10-06

“Approximately 62% of Americans have less than $1,000 in their savings accounts and 21% don’t even have a savings account, according to a new survey of more than 5,000 adults conducted this month by Google Consumer Survey for personal finance website GOBankingRates.com. “

Did you read even that little excerpt?! 21% don’t even have a savings account? Holy Sh*t. And 62% have less than a thousand. That’s so scary. By just saving a thousand, you’ll be better off than 62% of the United States.

Where To Save

Don’t listen to any other baloney out there. You want your emergency savings locked up tight in a savings account. Not the stock market, not a money market, not bonds. It needs to be liquid and easily accessible – FDIC backed.  If the rate of return on that account is small, that’s okay. After all, says Greg McBride senior financial analyst at Bankrate.com, “It’s not an investment—it’s a safety net.”

I personally recommend an online savings. They pay a lot better on these than anyone else. I use Ally.com for my emergency savings. But you can keep it wherever. Just needs to not be touched and left for when it is needed.

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Have a great weekend and see you again next week!

-Matt Dalton

2 thoughts on “Why You Need An Emercency Savings

  1. For such a young person you have this “locktite”. This is fabulous advise! Start as young as you can to save for the future an unexpected incidentals . S*** happens as they say ! Fabulous articles ! Keep them coming !

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