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Emergency Fund Basics: How to Manage Your Savings

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You know by now that emergency savings should be a top priority for your financial well-being, but it’s tougher to know when you should tap into your emergency account. Start by asking yourself these three questions when deciding whether to withdraw the money.

  • Is it unexpected? You should budget for recurring expenses, like property taxes and birthdays, and avoid taking money out of your emergency fund to pay for expected expenses.
  • Is it absolutely necessary? Pulling money from your emergency fund to repair a broken air-conditioning unit at the height of summer is one thing, but depleting your savings for a kitchen renovation or to fund a vacation isn’t recommended.
  • Is it urgent? Some things, like a pressing surgery or a faulty transmission, need to be dealt with promptly, but you might be able to hold off on things like scuffs in your car’s paint or a cracked phone screen.

While you should ultimately use your best judgment regarding which expenses warrant a withdrawal, we’ll share some of the recommended reasons you should dip into your reserves.

Unexpected medical expenses

A medical crisis and the accompanying hospital bills can threaten to put you in a mountain of debt if you lack a financial cushion. Even with good health insurance, there’s always a chance your out-of-pocket bills could total more than you expect to pay. However, you never want to delay needed medical treatment if you have money in your emergency fund to pay for it.

Urgent home or car repairs

If your car’s engine breaks down or your heating system stops working in the dead of winter, you may have no choice but to fix the problem immediately. You need your car to get to work or the grocery store, and you need to keep yourself and your family warm. Ideally, you should account for these kinds of expenses in your monthly housing budget, but if you haven’t been able to, draw from your emergency fund before going without your car or basic utilities.

Family emergencies

At some point, you might need to help with a parent’s medical bills or their retirement living situation. Additionally, while it’s never pleasant to think about, you might need to help with funeral expenses or to fly across the country to attend a memorial service. Having an emergency fund you can rely on will make an already difficult time that much less stressful.

Expenses related to a partner’s job loss

If your partner loses their job, it can be tough to get by on a reduced household income. Without a steady amount of money coming in, you might have no choice but to draw on your emergency fund. Ultimately, relying on your savings is still a better bet than racking up high-interest credit card debt.

By now, you should have a general understanding of when you should and shouldn’t withdraw from your emergency savings. Just remember that you should always repay whatever you take out and that you should consistently contribute to the fund to create a safety net in case of an emergency.

What’s the best type of account for my emergency savings?

There are two things to look for when deciding on the best account for you:

  1. High interest rates so that the fund will grow when left untouched
  2. Accessibility, so you can get to your money quickly should an emergency arise

While a regular savings account is a safe and easy place to keep your money, interest rates are typically quite low. A certificate of deposit, or CD, will often offer a much higher interest rate, but you are unable to access the money you place in a CD until the end of an agreed-upon term. Because you never know when unplanned expenses may come your way, a CD isn’t a great option for an emergency fund.

That leaves high-interest savings accounts, money market accounts and internet bank accounts as some of the best options for storing your emergency fund. They offer better interest rates than traditional savings accounts and typically permit up to six withdrawals per month, helping your savings grow while still giving you access to the money. Learn more about each of them below.

High-interest savings accounts

High-interest savings accounts, also called high-yield accounts, operate similarly to regular savings accounts but with better interest rates. High-yield accounts are great for earning more on your savings but typically have strict requirements, such as a minimum balance or a required number of monthly deposits, in order to retain the higher interest rate. To find the best high-yield account, shop around at various banks and other financial institutions and compare both the interest rates and the potential fees and requirements.

Money market accounts

Like high-yield accounts, money market accounts typically offer better interest rates than regular savings and checking accounts. Some money market accounts will also provide you with a debit card or checks, but it’s important to remember that there is usually a limit of six withdrawals per month. Additionally, money market accounts often come with fees and minimum deposit requirements, meaning they aren’t a great option if you’re starting your fund from scratch. Be sure to read the fine print before choosing this option.

Internet banks

Internet banks save money by not operating brick-and-mortar locations and, therefore, are able to offer low fees and higher interest rates on your savings. If you choose an internet bank, however, you will lose the in-person assistance you get from traditional banks. Further, many of these banks only provide savings accounts, so it may not be a good match if you want your savings and checking accounts in the same place.

No matter where you keep your emergency fund, the most important thing is to be diligent about saving and avoid withdrawing from the account unless it’s for a true emergency. That way, your savings are ready for you when you need the money the most.

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