The National Foundation for Credit Counseling, in a 2011 survey, found that 64 percent of Americans have fewer than $1,000 in emergency savings. Most respondents said that they either rely on a new loan or stop paying regular monthly bills to spend money on an unforeseen emergency. Emergency savings are the money set aside to cover for unexpected events such as job loss, auto repairs, medical emergencies, property damages or legal expenses.
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Factors Influencing Savings
Often, more than how much you must save, the question of how much you can realistically set aside in savings determines your model for emergency savings. For instance, an individual with a part-time job incurring out-of-pocket expenses for health insurance will likely save less than another individual with a full-time job that offers a medical insurance plan. Similarly, a household with two incomes will likely save more than a single-income household. The savings deemed as reasonable will differ from one individual to another, from one household to another. The two broad factors that will determine your savings are guaranteed income and unavoidable expenses.
If you haven't yet started making savings, begin with a short-term plan. Savings that can take care of household expenses for at least one additional month in the event of an unforeseen emergency are considered short-term savings. Typically, shot-term savers who earn more than $20,000 per year are advised to maintain a balance of $1,000 or more
in emergency savings at the end of every month. For households that make less than $20,000, an amount up to $500 can be a starting point to begin savings. A bank savings account with an ATM card or a checking account separate from the one that is used for monthly bills are ways to deposit short-term savings.
Savings that can take care of household expenses for the next six months or more are often referred to as long-term savings. Certificate of deposits (CDs) are long-term savings accounts where money are to cover for future expenses such as school tuition, buying homes or cars. Money from these can only be withdrawn at fixed term periods, which can range from once a month to once every five years. Individual retirement accounts also are examples of long-term savings. Long-term savings can range from $10,000 to $100,000 or more. Banks that pay decent interest on savings and avoid maintenance or fine-print fees are places to open a savings account.
Emergency Savings Calculator
In simple terms, possible savings per month will be the difference between your monthly income and monthly expenses. However, both income and expenses can be volatile. For instance, a higher return on investment can be unexpected income and fewer freelance assignment jobs can lower the monthly income. Several money advisory websites (see References) offer calculators that can help determine the amount of possible and required emergency savings per individual or household.
Category: Personal Finance