Most Americans cannot comfortably say they are financially prepared for an emergency. While your emergencies in college will hopefully remain in the realm of a broken laptop, having cash ready for any myriad of problems that inevitably arise is crucial for financial well being.
While setting an efficient budget can ensure the existence of some emergency cash, you will ultimately need to establish an emergency savings account, especially for after you graduate.
- Defining “emergency” expenses.
- Recommendations for college students’ emergency savings.
- Where to keep the money.
- How to build up emergency savings.
Defining “Emergency” Expenses
Conventionally, the emergency savings fund is just that – only for emergencies, which can be anything from a co-pay on a medical or legal bill to car trouble. You should not dip into it to buy a new TV; keep a regular savings account for that money.
Emergency Savings Size
Depending on whom you consult, an emergency savings account can range anywhere from $1,000 in cash to a full year’s salary for life’s problems.
As a college student, you should begin by setting aside just $50 – 100 each month. Your college emergency savings account need not be as substantial as the one you’ll need after you graduate. You can be a little more lenient with the term ‘emergency’ if you understand the point of the account.
Where to Keep the Money
To begin this important venture, you will need to find a competitive checking or savings account, which despite low interest rates, allows for immediate access to the money. Having said that, you will probably want to stay away from MMAs, which limit withdrawals and CDs, which forbid them altogether.
If you have more substantial responsibilities or a solid income, you may consider yourself ready to adhere to the strict rules of the emergency account. A comfortable amount to keep in a savings account would give you a three-to-six month buffer to cover your expenses in the event of a financial setback.
How to Build Your Emergency Savings
In either case, you should be teaching yourself to get into the habit of saving and disciplining yourself to spend it only in case of an emergency.
For this reason many financial analysts advise to treat the savings deposits as a bill. If you know you need to allocate a certain amount per month to the account, you are more likely to follow through — too much leeway and you will probably default on yourself.
Think about how that will look when you may need to pay someone else!
To help you allocate money that you’d rather spend on food and drink into an emergency account, consider automating your savings by setting up recurring transfers to your account. Even if you begin with as little as $20 a month you will at least have some money saved up until you can up that to a consistent $50 or $100.
That said, use these three basic methods to bulk up your savings account:
1. Track your spending
Make sure you have a handle on your spending, whether its through creating a budget or some other personal system, so you know where to cut back to maximize savings. Knowing your financial strengths and weaknesses will help you determine how to insure your lifestyle.
2. Change your habits
Getting in the habit of saving can be done as easily as opening a dedicated savings account. By constantly squirreling away a little bit of your paycheck each month your savings will be put on cruise control, and you will actually see your discipline pay off.
3. Devise a strategy
Once you begin accumulating funds you will need a good place to keep your money, so when picking a high-yield savings account remember:
Low-risk investments and liquid funds will ensure that your rainy day cash will be easily accessible and available when necessary.
Your returns through interest also must be strong enough to offset inflation because otherwise your hard-earned savings will be worth less when you need it than it was when you stashed it away.
- Emergency savings should be used for emergencies like car trouble or a medical bill.
- Put this cash in a high-yield savings account.
- Set your savings goal at 3 – 6 months of expenses.
- Continue building your emergency savings account until you’re comfortable.