We tend to think of emergency savings as an all-purpose resource that makes ends meet in an emergency. Unfortunately, one of the biggest misconceptions of maintaining an emergency fund is that it needs to be in savings accounts that often earn nothing on their principal and earn a fraction of what the one percent earns on their investments.
Unfortunately, the reality is the opposite. While Americans may be putting off or not saving enough to cover unexpected medical costs, a home or car repair, a car crash, or a total shock at job loss, people also are ignoring everyday emergencies, especially in comparison to the majority of the economy.
A recent poll, conducted by SURVEYGIRL®, shows 29% of Americans say they have no emergency savings at all. The average American has savings equal to 12.2% of their annual income – and that doesn’t even count emergency funds. Worse, about 30% of the uninsured, 18% of the underinsured, and 23% of the uninjured say they’ve put off an emergency trip to the doctor or dentist.
A lot can happen in less than six months. Many of us could need our car to be brought to a dealership, or face a financial loss that we were unable to anticipate. An unexpected illness or accident could destroy the retirement savings we’ve worked hard to achieve. To cover the unexpected, many Americans turn to credit cards or a short-term loan. This situation can get costly and out of control, with interest rates being as high as 35%.
It’s important to note that credit cards can serve as a great vehicle for creating emergency funds by saving you from missed payments or exceeding the credit limit on a credit card. You can also use a credit card to build emergency savings by building an “in case of emergency” account. One of the most ideal ways to create an emergency fund is to use credit cards as cash. Interest rates are significantly less than if you were to use a credit card and put it to work as a savings account.
Even if you can’t use credit cards to pay for emergency funds, it’s a great idea to establish an emergency fund in a savings account at a bank or credit union with no monthly minimums and no penalties for early withdrawal. You’ll be able to access the money and will only pay a small cost if you’re late with the withdrawal. If you are having difficulty getting the funds you need, you can also save with an online bill payment service that will pay your bills for you using a mobile app.
Setting aside money on a regular basis has a real impact on your finances and your ability to pay for life’s inevitable but preventable expenses. Emergency funds can help you recover from calamities both small and large and keep you well-positioned to handle any unexpected emergencies.
Our new Idea Funder’s webinar: Setting Aside Money for Emergencies – part of our weekly Idea Funder series – is this Wednesday, June 6, from 11am-12pm ET / 8am-9am PT.