A 2015 survey by GOBankingRates found that 62% of Americans have less than $1,000 in savings, and about 21% don’t have a savings account at all. I’m often surprised by these types of figures, especially since money experts have been preaching the importance of saving for as long as I can remember. But I also know how difficult it is to save.
Still, we shouldn’t push aside the idea of building a personal savings account, which is an account separate from retirement accounts like a 401(k). A retirement account prepares us for the future, but it doesn’t provide immediate liquid cash for life’s unexpected expenses. Given how credit cards are so easily accessible, some people mistakenly view credit as a backup emergency fund. But this thinking gets many into serious trouble.
If you want to improve the way you manage money, you have to make saving a priority. Life is full of surprises, and there will be time when you’ll be happy you built an emergency stash.
Paying Medical Expenses
I know firsthand that having health insurance does not protect us from costly medical bills. Despite paying nearly $8,400 a year out-of-pocket for health insurance—my husband and I are both self-employed—we have a $2,000 deductible and 20% coinsurance. We’re able to see our primary care physician and only pay a $25 co-pay. But when it comes to other services like a specialist visit, lab work, procedures, etc., we have to pay $2,000 out-of-pocket every year before our insurance picks up the tab.
Unless you have the Cadillac of health insurance plans, you’re likely in the same boat, which means a 20-minute trip to the doctor may always result in a balance due. There’s the option of setting up a payment plan with your doctor or hospital. But if you have money in the bank, you can write a check for what you owe and put the bill behind you.
Whether you’re laid off or you give a two week’s notice because you can no longer take your employer’s craziness, a sizable bank account provides a cushion as you look for new employment, and it can take a weight off your shoulder.
A savings account is a godsend after getting laid off (so is a side-gig), especially since unemployment benefits are only a percentage of your regular earnings. Having as little as two to three month’s worth of income in the bank can keep your head above water until you get back on your feet.
Costly Home/Car Repairs
If you own a home or a car, you’ll likely get hit with at least one major repair that forces you to shell out hundreds or thousands of dollars. I’ve heard stories of people spending $6,000 to $10,000 replacing their HVAC systems, and I know from experience that replacing a roof is just as expensive. Cars and homes require ongoing maintenance and you can easily spend several hundred dollars every year on minor fixes.
Having a savings account to offset these costs will help soften the blow when unexpected car or home repairs come up.
There’s nothing wrong with a good time. But even if you plan ahead and save for certain experiences and vacations, you might receive an invitation for spur-of-the-moment fun with family or friends. This can include a getaway or other spontaneous outings such as attending a music concert.
No matter the plans, it’s easier to join in the festivities when you have a savings account that allows guilt-free fun. Guilt-free in the sense that you don’t have to use a credit card or spend bill money.
One common budgeting mistake is forgetting to plan for annual expenses. These include property taxes, gifts and other expenses that come around once a year. If you forget about these expenses and don’t plan accordingly, you might find yourself short on cash when it’s time to pay up.
Estimate your annual costs for these types of fees and divide by 12. From there, you can put that dollar amount in a specific savings account each month. Saving over time is much easier than coming up with it all at once.
With a savings account you’ve allocated for a specific purpose, you can dip into your account and take care of the expense instead of using a credit card. Rather than pay back a credit card company, you can pay yourself back interest free.
When You Want to Help Someone
I’m not suggesting you go around giving everyone a handout. But if there comes a time when you want to help someone financially, a savings account gives you the opportunity to experience the happiness of giving. Your generosity can make a huge difference in someone else’s life. Just make sure you understand the rules of giving money to friends or family. Clearly spell out the terms (is the money a gift or a loan?), and only give what you can afford to lose.
You may not fully grasp the importance of saving until you’re caught in a situation where you need extra funds. Saving money isn’t the easiest thing to do, and truthfully, you might not have resources to build a large reserve. But as long as you’re consistently putting something in your account every month, you’ll have some extra funds & be happy you saved up when unexpected expenses come up.
Want more help with saving? Check out my new course, Taming Your Finances (& Saving $5,000 in the Process) to learn more!