In life, surprise expenses are bound to happen. If you had an unexpected expense of $400, would you be able to pay for it? If your answer is, “No,” you’re not alone. In a recent survey, thirty-seven percent of Americans said they would have difficulty with an emergency expense of$400.¹ Furthermore, over 145 million Americans have little or no savings at all.²
Having an emergency fund can keep an emergency from becoming a financial catastrophe and can help you avoid having to take early withdrawals or loans from your retirement plan account to cover it. With an emergency fund in your back pocket, you will have the funds to cover unanticipated expenses in life such as job loss, medical or dental emergencies, home and car repairs, or unplanned travel expenses.
If you do not already have an emergency fund, your goal should be to open an account that you promise yourself to access only in case of an emergency. Start with a reasonable savings goal, such as $1,000. Eventually, your goal should be to maintain three to six months’ worth of expenses in your emergency fund.
Emergency funds can come in many forms:
- A savings account from your local bank can be an easy way to start an emergency fund. Deposits up to $250,000 are insured by the FDIC and are very easy to access. One drawback is that standard savings accounts typically provide a meager rate of return, so assets won’t grow significantly due to interest.
- High-interest savings accounts are a great choice for emergency funds. They typically provide a better rate of return than a standard savings account, with minimal risk. Like a standard savings account, high-interest savings accounts are insured by the FDIC for deposits up to $250,000. Pay attention to the terms of a high-interest savings account before opening one, such as minimum deposit requirements and ongoing fees.
- Brokerage accounts allow you to invest your savings with the goal of long-term growth. However, if you plan to use some of your brokerage account assets for emergencies, keep those assets invested conservatively. You don’t want to be forced to sell aggressive investments at a loss during a down market, or an economic recession (which often coincides with a market downturn). A recession may be just the time when you are more likely to need your emergency funds, so be sure to plan your investments accordingly if you foresee yourself withdrawing in the near future. Transaction fees may apply.
We’re here to help
At BerganKDV, our Retirement Plan Solutions (RPS) team helps employers navigate the intricacies of maintaining a compliant retirement plan while maximizing participation and managing investment options. We empower our clients with educational resources and training so both employers and their employees feel confident they are getting the most out of their plans and saving for their best financial futures.
If you have questions about what our RPS team can do for your retirement plan, contact us today, and one of our advisors would be happy to discuss it further. Let’s talk!
¹Fed Reserve Report on the Economic Well-Being of U.S. Households in 2019. May 2020.
²GOBankingRates Survey: 69% of Americans Have Less Than $1,000 in Savings, December 2019
Adapted from RPAG, ACR# 4695467 04/22.
