Why Should Creating an Emergency Fund Be a Top Priority?
It’s a smart time to start an emergency fund if you haven’t already done so! While high inflation and the risk of a recession pose real threats to your future, rising interest rates make it easier than ever to start saving. Here’s why creating an emergency fund should be a top priority.
IN CASE OF EMERGENCY: HOW TO BE PREPARED
No one likes to think about what could go wrong, but wise financial planning means doing just that. Unexpected events and unforeseen expenses can easily derail years of hard work unless you are prepared. That’s why it’s important to build an emergency fund along with your budget and long-term savings plans. Read on to learn more.
WHAT IS AN EMERGENCY FUND?
An emergency fund is money you keep separate from your day-to-day spending, budgeted finances, and long-term savings to pay for unexpected expenses or emergencies. This money needs to be kept safe but still remain accessible.
WHY IS IT IMPORTANT TO HAVE ONE?
An emergency fund is intended to help you pay for large and unexpected costs without blowing your month-to-month budget or forcing you to dip into your savings, especially long-term savings like your retirement or college savings accounts.
Ideally, your emergency fund should be able to cover unforeseen or unexpected expenses that may not be covered by your insurance, including:
Unforeseen medical costs
Unplanned home or appliance repairs
Unexpected car repairs
In the worst case, your emergency fund can provide some crucial breathing room if you lose your job, your income dries up, or you need to take time off work to care for a relative. It’s important to plan for the unexpected now, whenever higher interest rates make it risky to rely too heavily on your credit card, and the risk of a recession increases economic uncertainty.
HOW MUCH SHOULD YOU HAVE IN YOUR FUND?
Most experts recommend saving enough money to cover your basic expenses for at least three months. Some have suggested you should try to set aside six months’ expenses or more, especially since rising inflation means the money you set aside will buy less when you need it.
Of course, it is difficult to plan for unforeseen circumstances and the more you can save, the better. But the idea is to minimize the chance that unforeseen or short-term disruptions will disrupt your long-term financial planning.
WHERE SHOULD YOU KEEP YOUR FUND?
An emergency fund needs to be kept separate enough from your day-to-day expenses so that you are not tempted to dip into it to cover minor expenses you failed to budget for. At the same time, the money needs to be quickly accessible for when you do need it.
It is also important that your emergency money remain safe, both from the risk of financial mismanagement by a bank and from loss through risky investments. And, with high inflation set to continue for the foreseeable future, any medium to long-term fund has to earn reasonable interest in order to protect its purchasing value over time.
With all this in mind, most experts recommend you keep your emergency fund in an interest-bearing savings or money market account at your bank or credit union. Let’s take a closer look at your options.
SAVINGS ACCOUNTS
A traditional savings account provides a convenient, easy-to-access place to store cash separate from the day-to-day expenditure flowing through your checking account. At the same time, should you need it, your money can be instantly transferred into your checking account, used to pay bills online, or even withdrawn as cash from an ATM.
Savings account balances are also insured by either the FDIC or NCUA against loss to a total of $250,000. Your balance will also usually attract some interest through dividend payments.
MONEY MARKET ACCOUNTS
Money market accounts offer almost all of the flexibility of savings accounts but with significantly higher interest rates. This is done generally by restricting the number of transactions you can carry out each month and by requiring depositors to maintain a higher minimum balance than most savings accounts.
This allows banks and credit unions to offer annual percentage rates (APYs) based more closely on prevailing market interest rates. As a result, you’ll earn more generous dividends while your emergency money remains instantly accessible through checking or debit card services linked to your money market account.
At the same time, money market accounts enjoy the same protection from the FDIC and NCUA as savings and checking accounts do. With security, flexibility, and a more generous APY, a money market account is an ideal place to stash your emergency fund.
BANK VS. CREDIT UNION
It’s also worth considering the unique benefits of a credit union when it comes to setting up an account for your emergency fund or any other long-term savings. While banks and credit unions offer many of the same services on paper, credit unions are local financial cooperatives so they are directly invested in your financial success in a way that big commercial banks are not.
This means that as a member, your local credit union is more likely to take the time to understand your financial needs before recommending a savings product because their long-term success is ultimately tied directly to yours.
And, because credit unions are owned by their members rather than stockholders, they can offer lower fees, more flexible terms, and higher interest rates than comparable products from commercial banks.
To enjoy these benefits, you need to be eligible to join a local credit union, but eligibility requirements are broad and generally require that you live, work, or worship in a particular area; work for a particular company or in a certain field; or attend or work for a particular college or university. There is almost certainly a credit union open to you in your local community.
GHS: YOUR LONG-TERM SAVINGS PARTNER
Whether you are looking for a place to stow emergency funds, working towards a major purchase, or building a long-term savings nest egg, GHS Federal Credit Union has the smart flexible products, generous rates, and personalized service our members deserve.
Our Regular Share Savings Account makes a great choice as your primary savings account with:
No minimum balance
Unlimited transfer
Easy access via the GHS online/mobile banking app
Fully insured by the NCUA to $250,000
At the same time, our Secondary Share Account provides all the flexibility as our regular savings account, while allowing you to separate out short-term savings for a vacation, a big purchase, or an emergency fund.
For those serious about maximizing earnings for an emergency fund or major purchase, a GHS Money Market account is ideal, offering:
Higher market-linked APY
Easy access to funds via check and debit card
Fully NCUA-insured to $250,000
Building your emergency fund in a GHS money market account is a safe and sensible investment in your financial future. Click below to learn more.