Why a Savings Safety Net Is Necessary for Financial Stability
Economic fluctuations can cause financial hardships for anyone, at any time. While financial planning is often viewed as the means for preparing for retirement, and something that younger adults may not need to be concerned with, establishing a savings safety net is the best way for adults of all ages to prepare for the unexpected.
In a recent American Payroll Association survey, 69% of respondents said they would find it somewhat or very difficult to meet their financial obligations if their paycheck was delayed by even a week. And in a Pew Research survey conducted in August, adults between 18 and 29 years old were the age group with the greatest number (54%) to report that either they or another person in their household were laid off or took a pay cut due to the coronavirus outbreak. An unexpected job loss, reduction in hours, or delay in being paid could devastate your finances if you don’t have a financial cushion.
It may not seem possible to grow your savings when you’re living paycheck to paycheck, but it’s not only possible — it’s necessary for financial stability. Start protecting your finances by establishing an emergency savings fund, which acts as a savings safety net.
How much of a safety net do I need?
Financial experts recommend households set aside 3 to 6 months of living expenses in a separate emergency savings account. Some recommend 9 to 12 months of expenses if you are the sole provider for the household or have an irregular income. The exact amount will vary depending on your particular situation and comfort level.
While there’s no one-size-fits-all answer, the amount most households need to save is often less than they imagine. This cash reserve isn’t meant to maintain a lifestyle of vacations, restaurant meals, or entertainment, but only the necessities — housing, groceries, utilities, insurance premiums, and essential medications.
Once you’ve saved enough for your initial safety net, consider boosting your savings to include other expenses that aren’t part of your regular monthly budget. These could include home maintenance, vehicle repairs, and maybe even a few small luxuries. Adding these expenses to your savings fund can provide additional peace of mind.
General emergency fund savings recommendations:
- 6 months of living expenses that can be used to pay bills while you search for a new job
- An amount equal to your annual medical insurance deductible
- 1% of your home’s value for yearly repairs and maintenance
- Use Edmunds True Cost to Own® calculator to determine how much you should set aside for maintenance and repairs of your vehicles
What are the quickest ways to meet my safety net savings goal while living paycheck to paycheck?
Saving money when funds are tight can be challenging, but it’s not impossible. Having a plan makes it easier. Here are several actions you can take to build your savings safety net quickly:
- Deposit funds into a savings account that pays interest on the balance.
- Downgrade optional expenses such as entertainment, subscription services, and mobile phone data plans and reroute those savings into your account.
- Shop around for better rates on your auto and home insurance coverage, then apply the savings to your account.
- Sell unwanted household items and deposit the cash into your savings account.
- Deposit cash windfalls such as tax refund* checks and financial gifts.
- Increase your income with a second job, and deposit the additional funds into your savings account.
- Create a line item in your budget equal to the amount you’re saving by reducing other budgetary expenses.
When is it okay to use safety net funds?
Only you can determine what constitutes an emergency or necessary expense. However, using the funds on impulse buys can unravel all your hard work. It can also put you in a bind when you need the money for an actual emergency.
At some point, you will need to use the money in your account. Don’t be afraid to use it when you need it, such as when you lose your income or need to replace your car’s transmission. Once you recover financially, work on replenishing your savings safety net by using some of the same tactics you used to initially establish it.
Safety Net Savings Tips
Ready to get started? Use these additional tips to start saving today.
- Avoid co-mingling funds with other savings or checking accounts.
- Start small with a savings goal of $500.00. Set incremental goals until you reach your savings target.
- Build your savings quickly while motivation is high.
- Set up an automatic transfer from your checking account to your emergency savings account at least monthly.
- Keep funds in an account you can easily access without withdrawal penalties.
- Review your emergency savings needs at least annually to determine if you should be saving more or less than your target amount.
A savings safety net can be the financial lifeline you need when the unexpected happens. Open a Statement Savings Account today and start building your fund with an initial deposit of $100. Earn interest on your deposits and watch your account grow faster.
*Ephrata National Bank does not offer tax advice, please consult with your tax professional.