By: Raymond Kirk, Ph. D., Federal Benefits Specialist
Published: April 20, 2018
You had an unexpected car repair; a squirrel got into your attic, your water heater ruptured. Sudden unplanned expenses can play havoc with your budget and you are not alone. More than one-third of households (34 percent) endured a major unexpected expense over the past year, according to Bankrate’s latest Financial Security Index survey.
Only 39 percent said they could cover a $1,000 expense with savings. A quarter of the households would borrow from friends or cut back on other regular monthly expenses. One out of five would use a credit card and pay off over time, making the total cost even greater. Your best protection is to have an emergency savings fund as a cushion.
An emergency fund is a separate savings or bank account used to cover or offset the expense of an unforeseen situation. It shouldn’t be considered a nest egg or calculated as part of a long-term savings plan for college tuition, a new car, or a vacation. It isn’t a slush fund for large entertainment and leisure purposes. Instead, this fund serves as a safety net, only to be tapped when financial crises occur.
A true emergency is a situation that requires some sort of immediate action, and that can affect your long-term well-being or impact the viability of an important asset such as repairing your roof after a storm or fixing your car so you can get to work. A new big screen TV doesn’t qualify as an emergency, even if your old TV breaks down.
Tips to help create an emergency savings account.
- Set a goal. One to two thousand dollars will help weather many day-to-day unexpected emergencies.
- Save first. Many people try to save out of the money left over each month. Do the reverse. Have a portion of your paycheck go directly into a savings account.
- Start early. Get in the savings habit. The sooner you start saving, the easier it is to stick with the habit and the sooner you’ll have your emergency cushion.
- Separate your money. Open a dedicated savings account for your emergency savings. A separate account will remove the temptation to spend the emergency savings you might have if its mixed with your checking account. When you have an emergency fund, you have peace of mind. Your money is on guard, just waiting to be called into action. You don’t have to scramble to come up with money needed or turn to credit cards. Even if your emergency fund isn’t big enough to handle everything, it can still help reduce the amount of money you ask from friends and family or pay with credit cards.
You can find more tips about starting the saving habit at the America Saves website www.americasaves.org.
Dr. Raymond Kirk, Ph.D. is a former Federal employee with over 40 years of Federal Service, 34 of which were spent with the Office of Personnel Management. He was the manager of the Benefit Officers’ Training and Development in Retirement Services for the last 12 years of his career. He is a Federal Benefits Specialist and seminar presenter for NITP.