Whether you call it an emergency reserve or a rainy-day fund, there's no question that setting aside money for unexpected expenses is a wise financial move.
Since it's impossible to control (or predict) when issues like medical concerns, job losses, or other financial strains will come up, having some cash available in savings can be a life-saver — literally.
As Business Insider's Tanza Loudenback reports, a single-earner household should aim for a minimum of six months' worth of expenses saved. Dual-income households and single-income households with a sizable alternate source of income should aim for at least three months worth of expenses saved.
But how much you save in your rainy-day fund ultimately depends on the amount of risk you anticipate and how much you can reasonably afford to set aside each month.
If you want to prioritize building a solid rainy-day fund — or refocus on saving in general — Tim Clairmont, a financial planner and CEO of Clear Financial Partners in Lake Oswego, Oregon, says it's vital to treat your savings like a bill.
"Regular contributions to savings accounts and investment accounts can be one of the best ways to build wealth over time, so push yourself to save a little more than you're comfortable with," he says. "And don't stop or decrease the contributions when times get tough. You can find another way."
How to treat your savings like a bill
While it's easy to spend extra money on everyday indulgences like eating out and shopping, your emergency fund should be a priority. In other words, contribute to your own savings accounts with the same level of commitment as you would your house payment or credit card bill — and don't neglect to pay yourself when other expenses come up.
One effective way to make sure you don't drop the ball on contributing to your rainy-day account is automating your savings. Set up an automatic transfer to your savings from your checking each month and, says Clairmont, you'll learn how to live on less — so you can save more.
"The biggest problems we see in poor financial management come from clients overspending," he says. "When you treat your savings like a bill and automate it, you get used to living on the remainder."
Save your money somewhere you can get it easily when you need it
The whole point of emergency reserves is liquidity: You want to be able to quickly draw from your savings without difficulty or penalty when you need to. However, you don't want withdrawing to be too easy, or you might be tempted to pull money from the fund when circumstances don't absolutely require it
An emergency fund should ideally be a non-retirement account, since you'll face a penalty for withdrawing 401(k) or other retirement funds early (not to mention, you'll drain your retirement savings).
You'll also want to avoid holding emergency funds in stocks since they're inherently risky — and it'll take more time than you want to withdraw your money.
While a standard bank savings account is generally a safe place to hold your money, why not allow your hard-earned savings to accumulate a bit of interest while you're not using it?
There are a few different directions you can go, depending on your preferences (it may be a good idea to chat with your financial adviser if you need additional direction or have unique circumstances).
Generally, a high-yield savings account or a money-market account is a good place to get some growth without sacrificing security.
While Certificates of Deposit (CDs) and Treasury bills grow at a similar pace, the fact that you can't access your money immediately without paying a penalty means they're generally not ideal for a rainy-day fund.
Set yourself up for success by saving more now
No matter what you're saving for or where you choose to keep the money, cultivating future-focused habits will ultimately help protect you. Since making a series of small sacrifices in the present is the most reliable way to ensure financial security down the road, start prioritizing your savings now.
Clairmont says many of his clients who prioritized their savings earlier on in their lives don't worry about their budgets, because they learned the habit of spending less than their paychecks. Not only do these clients have more money for the future because they saved diligently, they also trained themselves to live on less than what they earned.
"Many of my wealthiest clients are everyday people who were simply really good savers," he says. "The commitment to make sure that 'bill' is paid every month or at least every year has helped so many average-earning Americans reach financial freedom."