Savings Times Three

We have come to recognize that the strategies we need to apply are different for different types of savings. Emergency Savings are for unexpected expenses, like an unforeseen car repair. Savings to Spend are for future expenses, such as vacations. Savings for Retirement are funds invested to cover future living expenses after you are no longer working.

Understanding the role of Emergency Savings is one of the biggest challenges. Most importantly, Emergency Savings must be funded separately from other savings accounts. Here are a few other best practices:

• Many base emergency savings on salary replacement, but really you need to set aside enough to meet your monthly expenses. Use our Budget Planner Calculator to better understand your monthly and annual income, expense and cash flow.
• Depending on your income volatility, your Emergency Savings needs vary. If you are in a salaried position, it’s common to save up 3 months of expenses. However, if you have variable income (such as a commissioned sales position), you probably need to put away 6 months’ worth.
• If you’re already there (or close), congratulations! Maintain your account by adding just enough each month to keep up with changes in your expenses.
• If you are more than one month shy of these levels, funding your emergency savings should be a priority. One approach is to save at least one month of expenses each year until you reach your goal.

Once you recognize that you should be managing three savings buckets — not just one — you’ve taken the first step towards understanding the role of savings in your financial plan.