Saving money for emergencies is an important part of a healthy financial plan, but it can be challenging for many Americans. According to an annual financial literacy survey by the National Foundation for Credit Counseling, roughly a third of respondents don’t have enough cash in savings to cover a $2,000 expense.
There are several ways to get money in a pinch, but most of them involve borrowing, often at a higher interest rate. Building an emergency fund may not help you with current financial needs, but it can safeguard your financial well-being in the future.
Here are some do’s and don’ts to keep in mind as you work on your goal.
1. Do open a separate savings account
It can be difficult to keep track of your emergency savings if it’s combined with your savings for other financial goals.
Opening a separate savings account—for this and other goals—can help you keep track of where you stand, and it can help ensure you don’t dip into your emergency fund for other things.
There are several high-yield savings accounts that provide a higher annual percentage yield (APY) than the average savings rate you might get with a major bank—sometimes 10 or even 20 times as much.
Explore how you can earn more with a high-yield savings account to maximize your value.
2. Do set up automatic transfers
If your plan is to save whatever you have leftover at the end of the month, you may find it easier to spend that money than set it aside. By setting up automatic transfers every month from your checking account, you’re effectively treating your savings goal as a bill, which can increase your chances of maximizing your savings.
3. Do set goals
Most financial experts recommend working toward having three to six months’ worth of basic expenses set aside for a rainy day.
While that may not be feasible for some, take some time to consider your situation, including your current ability to save and what amount would make you feel safe, to determine how much you want to have in the bank for an emergency.
Also, keep in mind that your goals and ability to save can change over time, so make adjustments as needed.
4. Don’t make credit cards your ’emergency fund’
If you have a credit card, especially one with a single-digit interest rate, you may be tempted to simply use that as your emergency fund. While that’s better than taking out a payday loan or dipping into your retirement savings, it could end up making your financial situation even worse.
That’s because credit cards don’t have set repayment terms. If you don’t have a plan for repayment, you could end up paying off that debt for months or even years to come.
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