Money Advice

The boring account that could save your finances

Posted by The Simply Money Advisors Team on Oct 2, 2018 12:36:07 PM

How prepared are you for a financial emergency in your life?

Just think about it. What happens if your furnace would go out? Or you lose your job? Or your spouse needs an unexpected medical procedure?

Do you have money readily available to cover those costs? Or would you have to pull from your retirement accounts or put the bills on your credit card?

Americans aren’t prepared

Hopefully you fall into the former group and have an emergency fund in place to help pay for emergency money needs. Yet, according to a recent survey from Bankrate.com, 23% of Americans do not have any money to cover unexpected expenses. Another 22% only have enough to cover less than three months’ worth of expenses.

Even worse? People who pull from their retirement accounts to pay for life’s day-to-day surprises are only hurting their future selves. A study from the Center for Retirement Research at Boston College found that 401(k) “leakage” – which includes loans and hardship withdrawals – can reduce wealth in retirement by about 25%.

How much you should save

Bluntly speaking, an emergency fund is the financial foundation you should have in place before you do anything else with your money – including investing. This “padding” will help you better withstand life’s unknowns, protecting your finances – and even your retirement – from potential disaster.

At Simply Money Advisors, we recommend your emergency fund has enough money to cover at least three months’ worth of your most vital living expenses, such as your mortgage, your car payments, your utility and grocery bills, insurance.

But ideally, your emergency fund should cover six months of these expenses.

The added benefit

Having a properly-funded emergency fund also comes with an additional benefit besides giving you the flexibility to pay for unforeseen expenses; it can also help reduce your stress level. And, given that 59% of U.S. workers surveyed in the Global Benefits Attitudes Survey say they’re worried about the current state of their finances, this would probably be a welcomed change.

The simple fact of just knowing you’ll be able to weather a financial storm is a huge weight off of anyone’s shoulders. Your brain subconsciously realizes, “Hey, we’re going to be fine if a big bill pops up.”

This added sense of emotional security makes having an emergency fund even more critical.

Where to keep it

One of the questions we often get about emergency funds is, “But where do I put it?”

This is not an account that should be exposed to risk (i.e., being in the stock market) and it needs to be “liquid” (meaning easily accessible), so the answer is simple: a plain-old savings account or money market account is fine.

However, considering interest rates are still pretty low for savings accounts and money market accounts right now, you'll probably notice your emergency fund won’t earn a lot of interest… but that’s OK. The goal of this money isn’t to “grow,” so to speak.

It just needs to be there for you, whenever you need it, without penalty.

The Simply Money Point

Sure, an emergency fund is the least exciting kind of account you can have. It’s not flashy. It won’t make you a ton of money. It’s basically the Clark Kent of all your accounts: seemingly boring on the outside, but when the time comes, pretty handy to have around to save the day.

To learn more about getting on track for retirement, visit our Retirement Resources library for free educational materials.

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Topics: Financial Planning

Disclaimer

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Simply Money Advisors), or any non-investment related content, made reference to directly or indirectly will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, this content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained here serves as the receipt of, or as a substitute for, personalized investment advice from Simply Money Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Simply Money Advisors is neither a law firm, a certified public accounting firm, nor a tax advisory firm and no portion of the blog content should be construed as legal, accounting, or tax advice. Please consult your own attorney, accountant, and tax advisor for legal, accounting, and tax advice. A copy of the Simply Money Advisors’ current written disclosure statement discussing our advisory services and fees is available for review upon request. Advisory services offered through Simply Money Advisors, a SEC registered investment adviser. Insurance services are offered through Simply Money Insurance Agency, a separate entity from Simply Money Advisors. Simply Money™ and the spiral symbol are trademarks of Simply Money IP Holdings, LLC.

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