6 Tips to Help You Save for Emergencies

Imagine this scenario. You bite down on a popcorn kernel and break a molar in half. Ouch. Next stop: the dentist to have the tooth pulled, root canal performed, post inserted, temporary tooth made and put in, and crown added to replace the original tooth.

Total bill minus the costs of dental insurance premiums, the deductible and inflation? $2,500. Without dental insurance, probably double that. Either way, it’s a whole new kind of ouch.

That type of emergency is part of what’s fueling a trend this year in which more Americans, due to money fears generated in 2022, are focusing on setting aside money for near-term expenses instead of far-off goals. That means saving for expenses such as emergency dental work, a new computer to replace one gone black or a last-minute roofing project, rather than for retirement or college.

“Given the record-high inflation we’ve seen this past year, it’s not surprising that for the first time in the 14-year history of the [2023 Financial Resolutions] study, more people say they plan to save money for the short-term rather than the long-term as part of their New Year resolutions,” Rita Assaf, vice president of retirement planning for Fidelity Investments, says.

According to the study’s breakdown, 53% of respondents said they would set aside money for the short-term to cover such expenses as an overdue credit card bill, emergencies, the mortgage and big-ticket items, while 47% are continuing to prioritize funding for retirement, college, healthcare and long-term care. More than a third of respondents said that they are worse off financially than in the previous year, and many cited inflation as their top concern. The study found, too, that Americans characterize 2023 as “the year of living sensibly,” and 66%, versus 68% last year, were considering a financial new year’s resolution.

As most people know, resolutions made on Jan.1 often fade almost as quickly as they are spoken. Yet for those determined to give themselves financial peace of mind this year by having money at their fingertips when needed, there are strategies that can help.

“Defining the scope and scale here is important,” says Amir Noor, a certified financial planner and director of financial planning at United Financial Planning Group, LLC, in New York City. “Some people consider 'short-term' savings as the vacation they want to go on within the next 18 months. Some people consider saving for a house purchase within five years as 'short-term.' Technically, there is no standard.”

Short-term could also mean an emergency fund that covers between three to 12 months of expenses. For single Americans and sole income-generating partners, Betty Wang, a CFP and founder of BW Financial Planning in Denver, recommends aiming for the higher end of that range. The key is that the dollar amount you come up with must be based on what you actually spend and earn — not on a guess. To do so, get out pen, paper and calculator, bank and credit card statements, and receipts to nail down real numbers.

Regardless of your definition of 'short-term' or what specifically you’re aiming for, these six tips can help you bolster your savings.

1. Set the scene

Talk with your partner, spouse, or yourself, if single, about what constitutes an emergency in which you may have to tap into funds outside your regular budget. Then determine what it might cost to cover it. A busted water heater, for example, requires immediate attention and perhaps overtime pay for workers. Or a new car might be needed suddenly, if you and your spouse head to work in opposite directions.

2. Get expert help

Seek out expert financial advice. The problem with following online advice to a T, Noor says, is that it is written for a general audience and doesn’t consider your unique situation, including not only your savings and debts, but also your fears, preconceived, and perhaps faulty, notions as well as the desires and needs of others in your family. Some organizations, such as public libraries, offer free seminars, and financial planning organizations can provide lower-priced professional advice if you can’t afford to hire a financial planner at the full rate.

3. Take stock of your insurance coverage

Insure high-risk items, review premiums and deductibles and add them up to determine what you might have to cover out of pocket until your policy kicks in. Typically, cars, boats, and houses and apartments and their furnishings, plus routine healthcare are covered. If, for example, your apartment insurance deductible is $5,000, do you have that amount readily available, should a fire prevent you from living in your home?

4. Automate your short-term savings

Setting up automatic deposits into your savings ensures that you’re consistently socking away money and takes the extra work out remembering to do so. You can start small: In The Automatic Millionaire, best-selling author David Bach recounts how he started saving by putting aside just 1% of earnings; then, as he brought in more money, he upped the percentage.

5. Keep your stockpile handy

You want your short-term savings to be liquid, which you’ll have in a regular savings account, so that the money is quickly accessible. Consider opening an online, high-yield savings account — there are multiple banks out interest rates above 3% right now. Or, if you’re fairly certain you won’t need the money for a fixed time, see if you can get an even higher interest rate, and therefore higher return, with a Certificate of Deposit (CD) or U.S. Treasury savings bond. However, keep in mind that if you must tap into the funds sooner than the maturity date, you could be financially penalized for early withdrawal, Wang says.

6. Strike the right balance

Don’t think of savings as all or nothing, meaning all your extra money must go toward an emergency fund and none for retirement. There are a number of ways to manage this: 50:50, short-term: long-term; putting long-term savings on the back burner for, say, six to nine months, while you build up an emergency fund; or keeping your long-term savings formula as it is, while shaving unnecessary purchases and putting the savings from tightening your belt into a short-term savings account.

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