Out of sight, a starter emergency fund can grow in safety

Safe with key and dial.

In an unpredictable world, we at LSH feel that a starter emergency fund is crucial. This is Dave Ramsey's Baby Step 1. Life often brings unexpected expenses that can disrupt your peace of mind—whether it's your car having unexpected issues (which in 2024 can cost $500 to $600) or a cracked tooth needing dental bonding (ranging from $300 to 600 per tooth in 2024). In the 2024 Bankrate survey, approximately 27% of adults in the U.S. have 'No emergency savings', and "Only 44% of U.S. adults would pay an emergency expense of $1,000 or more from their savings". A starter emergency fund, of $1,000 helps buffer against immediate spending or income shocks. It is also great for your mental health.

You're ready to save and get that starter emergency fund in place. You want $1,000 put aside. Yes! We are rooting for you. You're about to use habits like the 'Habit of 10%' and the guide in 'Becoming a smiley saver' to build the account. You may be wondering what could count as an emergency if you needed to use the $1,000, and where to put this first $1,000.

Using a Starter Emergency Fund

This starter emergency fund of about $1,000 is strictly for emergencies and unexpected expenses, and not for savings goals like a trip to Italy with the family. So it's good to understand what is an emergency for you. Rachel Cruze highlights the 3 reasons to determine if an event or expense counts as an emergency. These are (Cruze, 2023):

1. Is it unexpected?

2. Is it necessary?

3. Is it urgent?

   
   

As Rachel Cruze highlights, “An emergency fund turns a financial crisis into an inconvenience.” Keeping these funds "out of sight, out of mind" makes it less likely that you will use them for non-essential purchases or dip into it for large saved expenses. You'll also know how much you have, and how much till you reach your $1,000 savings goal. If you need a tool to figure out how long it will take to reach $1,000, you can use this from Little Success Habits:

https://docs.google.com/spreadsheets/d/19rebZXCVzyAZ4IwZmezSZD0Ljlt5hRXJutcb0TQvDJI/edit?usp=sharing. The content is for informational purposes only, you should not construe any such information or material as legal, tax, investment, financial, or other advice. Any reference to specific products or services in this document is for informational purposes only and does not constitute an endorsement by Little Success Habits.

Out of sight, accessible, and growing in safety

This is precisely why we recommend having an emergency starter fund, kept out of direct view but still in mind, so we are aware of its existence. As Greg McBride from Bankrate points out, you should prioritize safety and accessibility (McBride, 2024). Readers should note that there are numerous options for where to keep your emergency starter fund of $1,000, and we share what has worked for us. It's important to research and understand your options before deciding what suits you best.

You can have the $1,000 in a savings account with "Federal Deposit Insurance Corp. (FDIC) coverage"), in a different bank, so that you know the cushion is there, and you can't use or mingle it with the other regular savings and money. That emergency starter fund is safe, sacred, and out of mind. It also grows in safety but is also accessible. For example, if another bank is used, the savings account with $1,000 can accrue some marginal interest and can be transferred to a connected checking account. Pro tip, if the connected checking account has a debit card, that $1,000 would be ready for immediate use if needed.

As Erica Stacey mentions, "A high-yield savings account is one of the best choices because it balances accessibility and earning potential" (Stacey, 2024). A HYSA is a great place to have interest that is higher than a conventional savings account.

For some people, having the starter emergency fund in the same account can help. Wherever you choose, start and grow your emergency starter fund to $1,000 (or more), and we suggest keeping it separate from the regular accounts you use.

Challenges Associated with a Starter Emergency Fund

There are challenges to establishing and maintaining this account or fund. These include:

1. Accessible Yet Untouchable

One major hurdle is keeping the funds truly "out of mind." This is why having it in a separate bank account helps. It's easy to justify purchases now that the money is there, for example, gifts for Christmas, which can lead you to dip into the emergency starter fund. Setting clear definitions for what constitutes an emergency like above, such as medical expenses, urgent home repairs, or being able to get to work, can help maintain your focus.

2. Slow Growth

Building your starter emergency fund can take a while and persistence. Depending on the approach you use, and the aggressiveness of the money you save, it can be weeks to months. If you find yourself in a financial bind while your savings accumulate slowly, it can feel frustrating.

3. Opportunity Cost

Money set aside in low-interest savings accounts may not keep pace with inflation. A typical savings account in December 2024 was approximately 0.42% interest per year, whereas inflation was 2.7% in the U.S. for November 2024 (Lam-Balfour, 2024). Yet, the peace of mind from knowing you are financially prepared often outweighs the concern over potential earnings. As highlighted, $1,000 won't earn much interest or keep up with inflation, unless you use a HYSA.

4. Setting Up the Account

Choosing the appropriate bank or credit union for your emergency fund can be difficult. You need an account that provides easy access and competitive interest rates without penalties or complications in accessing your funds.

5. Discipline

Contributing to this fund when you're just starting out or in debt is challenging. However, it's a wise decision to discipline yourself to save that money for any potential emergencies. Life happens, and you can be more ready for it.

Your Path to Financial Preparedness

Creating an emergency starter fund or account of $1,000 may seem daunting, but you are also up for the challenge and know having that $1,000 will make you feel more prepared. By putting your funds in a dedicated accessible account, you not only encourage better savings habits but also prepare for life’s uncertainties.

As you look toward your financial future, an emergency savings account can be your secret weapon of financial security. Start today, and embrace the peace of mind that comes with being financially prepared with a starter emergency fund.

To your success.