Stay Out of Debt – Save for Emergencies
Be prepared for unexpected expenses with a Cash Cushion just for emergencies.
Start an Emergency Savings Fund
Like insurance, it seems unnecessary until you need it. Having an emergency savings fund, what we call your Cash Cushion, is the seatbelt on your road to debt freedom.
The Benefits of an Emergency Cache
- It prevents your debt from increasing. A lucky few of us have never been in a car accident or lost our jobs. Financial preparedness eases the burden of taking out a high interest loan, which only increases your debt.
- It avoids late fees. Paying off an emergency is a huge suck to your monthly expenses, leading to late payments. A Cash Cushion helps avoid these fees like they’re orange cones on your driving test.
Prepare for 9 Months’ Worth of Expenses
But don’t focus on that huge number. Split it into smaller, more easily digested chunks. We like setting secondary savings goals of $500 or $1,000 and more easily keeping your final goal in perspective. Remember, no amount of savings is too small!
Grow Your Emergency Cache in the Best Place
But where do you put your Cash Cushion? Under your mattress? Buried in your backyard, like a pirate? While those ideas are viable, they arrrr-n’t your best option.
You should put your emergency savings in an online bank’s savings account with a high-yield compound interest rate.
Look for These Emergency Cache Features:
- A high APY (Annual Percentage Yield) – typically 0.65% to 0.90%
- No minimum monthly balance required
- No monthly fees
- Easy and free deposit process, either by check or online
Why this is a better option than hiding your cash away:
- It makes your money less accessible, hopefully keeping you from spending it.
- You will accrue interest on your fund, thus turning your money into more money without you having to do anything.
- Banks with no physical branches saves money on personnel and maintenance costs, which means less fees for you.
- While not easily accessible, treasure chests have terrible interest rates and abysmal customer service; trust us.
Take Care of Your Cash Cushion
As you’ve seen, your Cash Cushion protects you as you pay off your debt. Here are four strategies to keep yours in tip-top shape.