Everyone needs an emergency fund. It’s a crucial safety net that can help you respond to unexpected, urgent expenses immediately after they crop up. You can withdraw the necessary savings from your fund and resolve the issue without much stress.
More importantly, your emergency fund can help you stay afloat in times of hardship. If you’re ever in a situation where you unexpectedly lose your job or fall ill, you can manage your monthly expenses like mortgage payments and utility bills without your usual stream of income. You can maintain your financial stability during this incredibly difficult time.
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How much should you save in an emergency fund? A general rule of thumb is to save between 3 to 6 months’ worth of expenses inside of this fund. Some financial experts recommend putting away even more than that. They recommend that you save 9 or even 12 months’ worth of your expenses. Those are ambitious savings goals to take on.
How can you get started on your fund? Read this list of the best ways to grow your emergency savings.
Start A Budget
You can start by making a personal budget to determine how much you can afford to set aside for emergencies every single month without disrupting your ability to pay for other essentials, like groceries and utilities. It won’t take long. You can manage to craft a reasonable budget in a single weekend.
Although, your budget isn’t set in stone from the moment that you build it. You should review your budgetary guidelines every single month. You’ll want to revise and tweak certain categories to make sure that the formula perfectly suits your lifestyle.
Your emergency savings will grow quickly when you are consistent with your contributions. If you’re only adding to the fund sporadically, your savings will grow at a snail’s pace. To guarantee that you never forget a contribution, automate money transfers between your checking account and savings account on a monthly basis.
Choose a High-Yield Savings Account
A high-yield savings account is the perfect place to store your emergency fund. It has a higher interest rate than a standard savings account, offering an average annual percentage yield (APY) of 3-4%. This feature gives it a lot of growth potential. The more contributions that you add to the account, the more compounding interest it will accrue.
Build a CD Ladder
A Certificate of Deposit (CD) is a savings account that locks away the user’s funds for a set term. During that term, the funds accumulate interest. Similar to a high-yield savings account, a CD comes with an average APY of 3-5%.
It’s not recommended that you put all of your emergency savings into a CD. Doing that will make your emergency savings inaccessible until the CD’s term is complete — this could be 6 months or 5 years, depending on the account you join.
If an emergency expense occurs during that term, you will have to find an alternative means to manage it, like a credit card or a personal line of credit. Or you will have to request an early withdrawal from your CD, which will come with an early withdrawal penalty.
So, how can you grow your emergency savings with a CD? Keep a good portion of your savings in a high-yield savings account, where they are accessible. The remainder can be divided into a CD ladder — these are several CDs with ascending term limits. This way, you can grow your savings quickly without removing your entire safety net.
Invest in Stocks
Stock investments shouldn’t be used in place of an emergency fund. First of all, you can’t guarantee that your stock value will be good when an emergency falls into your lap. Second, the cash value of your stocks will not be readily available. You will have to go through the process of selling them off before you can make an urgent payment.
But this doesn’t mean that stock investments can’t help you grow your emergency savings! Similar to a CD ladder, you can use stocks to give your emergency savings a boost. Invest a small portion of your savings to encourage growth while leaving yourself a reliable safety net to fall back on.
Where can you make these investments? You can access them through a standard brokerage account. A standard brokerage account is an ideal account for this circumstance since you are growing savings for your emergency fund. If you were saving up for a retirement fund, you would want to open up an Individual Retirement Account (IRA) and make your investments through there.
What Types of Stocks Should You Invest In?
You will want to go for low-risk stock investments. While more high-risk investments can lead to higher rewards, they can also lead to higher losses. It’s not worth investing in something so volatile in hopes that you will strike gold. This website can provide you with real-time updates about stock market data to help you evaluate your decisions.
If you’re still not sure what to invest in, consider the following options:
Dividend stocks — also known as income stocks — are stocks that provide shareholders with portions of the company’s profit (dividends). When you invest in a dividend stock, you will get a cash payout (dividend) over the short term. Many companies offer quarterly dividends for investors. So, you could get a tangible reward for your investment four times a year. You can use these dividends to boost your emergency fund.
Be sure to choose dividend stocks that have strong growth potential. If the company has shown a steady increase in its dividends over the long term, this could be a safe investment choice. You could potentially receive higher cash payouts the longer that you commit to this investment.
If you can’t decide what stocks to invest in specifically, you can always choose to invest in an index fund. An index fund is a portfolio of stocks (or bonds) designed to track a certain index, like the S&P 500. It automatically offers investors a diverse portfolio, which minimizes the risk of investment loss — making it a low-risk choice for your long-term savings goals.
Index funds are also low maintenance since you do not need to commit to careful research to select your portfolio. This is why index funds are called “passive investing.” They require very little effort on your part.
There is more than one way to grow your emergency savings. You can try strategies from high-yield savings accounts to stock investments to boost the savings sitting in your emergency fund.