Emergency Savings - How much do you need?

July 23, 2020

A glass jar with Emergency Fund label sits on a desk.© Vitalii Vodolazskyi - stock.adobe.com

Unexpected situations arise, and when they happen, they can destroy your financial stability. An emergency savings fund can act as a safety net when your financial security is threatened by an unforeseen crisis. Here are some tips on how to build an emergency fund.

How much should you save?

While the amount you would need to save depends on your personal situation, many experts recommend saving at least enough to cover critical expenses for 3 to 6 months. Estimate your costs related to housing, food, health care and insurance, utilities, transportation, debt, and personal expenses. Exclude costs that you could reduce in case of major disaster, such as entertainment, dining out, and vacations. There are other scenarios when you may want to save more, such as during a recession, when layoffs are common in your industry, or when your income is not steady.

The idea of saving 3 to 6 months of expenses can be daunting, but don’t let it discourage you from establishing a disaster fund. Even a small backup fund can help you manage lesser emergencies without having to rely on high interest credit cards or other forms of debt.

Savings accounts

Many experts recommend keeping the emergency savings fund in a liquid account so you can access it when it is needed. A liquid bank account allows you to withdraw the funds easily, without delay, and without a penalty. Typical examples of liquid accounts include checking and savings accounts. Time deposits, such as certificates of deposits (CDs) and IRAs, are not considered liquid because of early withdrawal penalties.

RSI Bank offers an interest-earning Statement Savings account with no minimum balance fee and a $10.00 minimum balance to open, as well as other interest-earning checking, savings, and money market accounts.

Understanding and managing cash flow

Cash flow is a measurement that may help clarify how much you would need to save to cover essential expenses. Cash flow measures the money inflows, such as salary, and outflows, or expenses, for a specific time frame. Personal financial management tools, like Money Management, can help you predict cash flow by keeping track of recurring expenses and deposits made into your linked accounts. Money Management can also be used to set budgets, savings goals, and debt reduction targets – all useful tools to manage personal finances and build reserves. Money Management is free to RSI Bank customers and available in personal Online Banking and Mobile Banking1.

Strategies that can help you save

Automatic recurring transfers can be set up to withdraw a specific amount of money from one of your bank accounts and deposit it into another. Setting up automatic recurring transfers may help you set aside funds on a regular basis to reach your emergency savings goal. You can schedule free automatic transfers from your RSI Bank checking account to your RSI Bank savings account in any amount for $0.01 and up in Mobile Banking or Online Banking. It is also possible to move money between your RSI Bank accounts and other financial institutions using the external transfers service in Online Banking.

When scheduling automatic recurring transfers, it is wise to be aware of your checking account balances so you do not incur overdraft fees. Setting up low balance notifications, such as email, push or text alerts, can be helpful in monitoring your account balances. At RSI Bank, thresholds can be set up for minimum balance alerts in Online Banking and Mobile Banking.

Other savings strategies include making larger, lump sum deposits into the emergency savings fund. For example, if you receive a tax refund, consider depositing as much as you can into your emergency fund. If you are paid through direct deposit, you may also consider asking your employer if it is possible to split your paycheck between your checking and savings account.

Other considerations

Beyond your savings strategy, knowing when to use your emergency fund (and when not to use it) is key. Experts say the fund should only be used in the case of a true financial emergency. While financial emergencies may come in many forms, some of the most common are loss of a job, a serious illness, or an unexpected major repair.

Some people may benefit from paying down debt before building up a large cash reserve. According to NerdWallet.com, as of March 2020, the average U.S. household with revolving credit card debt (balances carried from month to month) owed over $6,500. If you have high interest revolving credit card debt, you may want to prioritize debt paydown before building savings. 

Emergency savings funds may not be for everyone. Consider your individual circumstances to determine if an emergency savings fund would be helpful to you. There is more than one way to prepare for a financial crisis; the point is to be prepared.
The information provided in this article is meant for educational purposes only and is not advice. Please speak with a Customer Service Representative for specific details on RSI Bank's deposit programs and services, such as Online Banking, Mobile Banking, Money Management, direct deposit, scheduled transfers, and debit cards.

Cellular data rates may apply to Mobile Banking.