(StatePoint) April is Financial Literacy Month, a time dedicated to teaching Americans how to establish and maintain good financial habits. The month provides a good opportunity to assess whether you have a solid plan in place to support your financial goals – and that means planning for emergency expenses, too.
The best time to plan for unexpected expenses is well before they happen. One strategy to consider is to open an emergency savings account where you can stash cash specifically for unexpected expenses or short-term savings goals. That way, you can avoid having to pay for these expenses with a credit card and incur interest.
Regardless of your financial circumstances, a rainy day fund offers peace of mind and, if you plan well, it won’t derail your other long-term savings goals. To get one started, consider the following tips from Ally Financial Inc., which offers personal finance tips, tools and education through its Wallet Wise financial literacy program:
• Create an account specifically for emergencies:
Many make the mistake of assuming that a standard savings account can also serve as a rainy day fund. However, dipping into savings when your roof leaks may not be the best solution.
Start an account whose only purpose is for emergencies. Some banks, such as Ally Bank, will allow you to create “nicknames” for the accounts to reinforce their purpose.
• Specify the amount to be allocated:
Set a goal for your fund that could cover most emergencies with a little extra to spare. (Some plumbing repairs can easily run close to $1,000.) Determine how much you would realistically need if an emergency were to arise.
Set up a recurring transfer or direct deposit to automate savings. If money is tight, decide where you’ll cut corners to make your plan work. For example, directing $30 a paycheck to a rainy day fund in lieu of going out for dinner one night will help plan for the future.
• Fee free is the way to be:
Maximize your savings potential by finding a bank that won’t charge you a monthly maintenance fee or penalize you for dipping into your emergency fund. Better yet, an account that earns a competitive interest rate or one that is compounded daily will allow your emergency fund to grow faster on its own.
• Ensure you can access funds:
Many money market accounts come with checks or a debit card to ensure quick access to funds because emergencies usually don’t happen at convenient times.
The benefits of such accounts allow you to pay a locksmith, plumber or roofer directly without needing to run to the bank. Why add an additional step to a stressful situation?
For additional tips on what you need to know to be smart with your money, visit allywalletwise.com.
Everyone is going to face a situation where an emergency strains their budget. You don’t leave home in the rain without an umbrella, so don’t take on life without the same safety net. A rainy day fund is a smart way to guard against financial stress.
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