Savings Safety Nets More Important Than Ever

You never know what life might throw at you. Cars break down. Homes need maintenance. Jobs change. We have accidents or get sick. And, of course, bad news usually gets worse after you realize how much it’s going to cost you.

Even good news comes at a price these days. A new job or promotion may require a move. A wedding or new addition to the family brings its own expenses. This paired with the unpredictable state of our economy makes it all more stressful. However, having a savings safety net—a thoroughly planned emergency savings—can give you some calm, certainty and stability while handling life’s more challenging moments.

What’s a Savings Safety Net?

Sometimes referred to as an emergency fund, a “savings safety net” is a more current term that may be a better fit for today’s financial situations. The idea is to set money aside while you can so that if a financially demanding life event happens, you’ll have resources in place to cover your needs.

The actual amount that you should set as your safety net goal varies according to your responsibilities, career and lifestyle. Ideally, the goal is to have enough money on hand to cover three to six months of expenses. Since most of us don’t have easy access to a lump sum that large, we have to be strategic with our current income, and save up towards our goal over time.

How to Set Up a Savings Safety Net

Your safety net should be an interest-bearing account that is set aside specifically for emergencies. Experts caution against mixing emergency savings with money that you might earmark for other purposes like retirement, education, cars or a home. The risk in doing this is simple — an emergency might wipe out those other funds or vice versa — the purchase of a vehicle or home or the cost of tuition might leave you with no buffer of emergency funds at all. Instead, dedicate a unique account as your safety net, so it only gets used for its purpose: emergencies.

A second factor to consider is ensuring the account’s funds not only will earn interest but also will be reasonably accessible to you without penalties for withdrawals. For example, certificates of deposit or share certificates may carry higher percentage earnings but have penalties for withdrawing funds before the certificate matures.

Individual retirement accounts, likewise, have age and use restrictions. A more advantageous choice may be a money market account that offers much higher earnings than a traditional savings account while allowing similar access and flexibility.

One of the easiest ways to build an emergency fund is to set up automatic deposits to a savings account through post-tax payroll deductions or automatic account transfers. The money goes to the account regularly to grow, and saving simply becomes a part of your budget.

Defining the Uses of Your Emergency Fund

A safety net is a purposed account that acts as a shock-absorber for emergencies. It provides financial resources that you have set aside, so you don’t have to resort to taking out emergency loans, running up credit card balances, or falling into delinquent or default status on bills. So, an important part of establishing a savings safety fund is defining in advance what qualifies as an emergency.

Income can change suddenly. Employers may cut wages, institute layoffs or close facilities, leaving you with reduced or no income until you find another job. While you may be eligible for unemployment benefits in a layoff or closure, in Louisiana, those “will equal 1/25 of the average of the total wages for covered employment paid to you during the 4 quarters of your base period.” For most people, this won’t cover monthly expenses.

Relocation may be necessary to find a new job. While some employers may assist with relocations, many will not. You may have to front funds yourself to get full or partial reimbursement later. If you own a home, you may have to cover expenses for both the home you are selling as well as the one that you’re buying or renting for a period of time.

Medical incidences can happen. Accidents, injuries and illnesses can result in significant medical bills while also impacting your ability to work. Even for individuals with full-coverage medical insurance, surprise medical bills due to unanticipated complications or the need for out-of-network specialists can result in thousands of dollars of debt.

Transportation issues can be costly. Cars are increasingly complex, with repairs that used to cost hundreds of dollars now costing thousands. For example, a new transmission may cost $4,000, and you still may be making payments on the initial car loan. Meanwhile, you need transportation to get to your job.

Homes need constant maintenance. Repairs to home systems like heating, air-conditioning, plumbing and electrical systems are often pricey. Likewise, new appliances are costly and may require additional home adaptations to accommodate them.

Your Path to Peace of Mind

Emergency savings accounts give you the advantage of financial resilience in the face of ever-increasing living costs and unpredictable times. Saving even the smallest amount adds up and may spare you the pain of unplanned debt.

Knowing how to manage your resources gives you the security needed to live the life you want. If you’d like to learn more about how to set up an emergency fund, the uses of an emergency safety net, or more ways to improve your financial resiliency, visit ACHIEVE for more insights.