5 Must-Have Savings Types to Safeguard Against Financial Surprises
Life can often throw unexpected challenges or expenses and catch you off-guard— an unexpected car repair, a sudden medical bill, or a job loss. This is why having a financial cushion that can prevent you from spiraling into stress and debt during hard times is important. An emergency fund can prove useful in times of distress. This way, you can prepare for emergencies without derailing your long-term goals.
Your emergency fund is like a trusted friend in times of need. But where do you park this fund? You need more than your basic savings account to save and grow your emergency fund. There are five types of savings accounts that you can use to safeguard your finances. These include an emergency savings account for unforeseen crises, a retirement fund to secure your future, a health savings account (HSA) to manage medical costs, dedicated savings for planned purchases, and a fund for irregular but predictable expenses. Together, they form a robust financial plan that shields you from uncertainty and allows you to build towards your financial goals with confidence. You may also consult with a financial advisor who can guide you on building and maximizing your savings for a rainy day.
This article explores different kinds of accounts where you can keep your emergency funds for easy access when you’re in a pinch.
Table of Contents
Below are the different types of savings you should have to tackle financial surprises:
1. Emergency savings account
An emergency savings account is a component of any solid financial plan that includes provisions for an emergency fund.
Experts suggest starting with a basic buffer of $1,000 in your emergency fund as a first step. This initial goal creates a foundation, giving you some peace of mind while you work on paying off any outstanding debts. Once that’s in place, aim to build up your fund to cover three to six months’ worth of living expenses. The exact amount will depend on factors like job security, income variability, and lifestyle, but the idea is to have enough set aside to sustain you during prolonged periods of financial difficulty.
If you are looking for ways to optimize your emergency savings, a tiered strategy can be particularly effective. This approach involves keeping a portion of your funds in cash for immediate access while placing the rest in slightly longer-term, low-risk investments like Treasury Inflation-Protected Securities (TIPS). These investments protect against inflation and can be quickly liquidated if needed, ensuring your money retains its value without sacrificing availability. By diversifying how you hold your emergency funds, you can strike a balance between growth and accessibility and achieve both stability and security in uncertain times.
2. Retirement savings account
Saving for retirement is a crucial aspect of long-term financial planning, yet it’s often overlooked or delayed. The sooner you start, the easier it becomes to build a substantial retirement fund, thanks to the power of compound interest. When you save early, your money has more time to grow, allowing your investments to earn returns, which then earn returns themselves, compounding over the years. This allows you to build a significant nest egg even with smaller monthly contributions.
There are several options for retirement savings accounts, each with unique benefits. Employer-sponsored 401(k) plans are popular due to their convenience and the added advantage of employer matching. If your employer offers to match a portion of your contributions, it’s essentially free money, and maximizing this match should be a priority. Beyond the 401(k), individual retirement accounts (IRAs) provide more flexibility. Traditional IRAs allow for tax-deductible contributions, reducing your taxable income in the present, while Roth IRAs offer tax-free withdrawals in retirement, making them a strategic choice for those who expect to be in a higher tax bracket later in life. For self-employed individuals, SEP IRAs offer a straightforward way to set aside significant funds on a tax-deferred basis.
You may also diversify across different types of accounts to optimize tax benefits. For example, contributing to both a traditional IRA and a Roth IRA can provide a mix of immediate tax savings and tax-free income in retirement. Doing so helps mitigate risks and ensures flexibility, as tax laws or your financial situation may change over the years.
3. Health Savings Account (HSA)
A Health Savings Account (HSA) is a powerful tool for managing healthcare expenses, offering unique tax advantages that make it an essential part of a well-rounded financial plan. The primary purpose of an HSA is to allow individuals to set aside pre-tax money specifically for medical costs. By contributing to an HSA, you can pay for qualified healthcare expenses without dipping into your after-tax income, effectively lowering your overall healthcare costs.
One of the biggest advantages of an HSA is its triple tax benefit: contributions are tax-deductible, the funds grow tax-free, and withdrawals are tax-free when used for eligible medical expenses. This means you can save on taxes at every stage, making HSAs one of the most tax-efficient savings vehicles available. Additionally, unlike Flexible Spending Accounts (FSAs), the funds in an HSA roll over from year to year, so you don’t lose any unspent money at the end of the year. This feature makes it a great option for long-term healthcare savings, especially for those anticipating future medical needs.
HSAs can also serve as a secondary retirement fund. If you don’t use your HSA funds for medical expenses, they can continue to grow tax-free, allowing your savings to compound over the years. After age 65, you can withdraw HSA funds for non-medical expenses without penalties (though you will need to pay income tax on these withdrawals, similar to a traditional IRA). This flexibility makes an HSA an excellent way to supplement your retirement savings, providing a backup that can be used for both healthcare and general retirement expenses if needed.
HSAs are best suited for individuals enrolled in high-deductible health plans (HDHPs). Since these plans generally have lower premiums but higher out-of-pocket costs, an HSA helps offset those expenses by enabling tax-free savings for future healthcare needs. It’s particularly advantageous for those who are generally healthy and want to save for potential medical expenses without paying high monthly premiums. However, even if you expect regular medical expenses, the tax benefits and flexibility of an HSA can make it a valuable part of your overall financial strategy.
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4. Personal savings for planned short-term goals
A personal savings account for planned short-term goals allows you to enjoy life’s little luxuries without jeopardizing your financial stability. Whether you’re saving up for a dream vacation, a new laptop, or a special gift, setting aside funds in advance helps you cover these expenses without dipping into your emergency savings or relying on credit. By planning ahead, you can make these purchases stress-free, knowing you’ve already budgeted for them.
The key to successful short-term saving is using a dedicated account separate from your everyday spending. High-yield savings accounts and money market accounts are often the best options. High-yield accounts, in particular, can help your savings grow faster thanks to better interest rates than standard accounts, even if the goal is to save up for just a few months. Keeping these funds separate also reduces the temptation to spend them impulsively, ensuring they are used exactly as planned.
To make the most of your savings for short-term goals, start by defining what you’re saving for and how much you need. Setting specific, realistic goals helps keep you focused and motivated. Once you’ve determined your target amount, allocate a sum each month to your dedicated savings account. Automating these transfers can be especially effective, ensuring consistent progress without requiring regular effort on your part. This way, when it’s time to make that big purchase or take that long-awaited trip, you can do so without disrupting your regular budget or borrowing funds.
5. Fund for irregular & recurring expenses
Not all expenses come around every month, but that doesn’t make them any less predictable. Annual insurance premiums, home maintenance, and even holiday gifts are costs you can anticipate, yet they often throw off your budget if you haven’t planned for them. Setting up a dedicated fund for these irregular, recurring expenses can help you manage these costs without disrupting your regular finances or, worse, having to dip into your emergency savings.
The main advantage of a fund for irregular expenses is that it ensures you’re prepared for these known but non-monthly costs. By saving a little bit each month, you spread the financial impact over the entire year, making it easier to handle big expenses when they do arrive. For example, if you know your home insurance premium is due in June, you can set aside a portion each month, so that when the bill comes, it’s already covered. This approach can be applied to car maintenance, annual subscriptions, and even seasonal expenses like holiday shopping or birthday gifts.
To make this work, integrate these expenses into your monthly budget. Start by listing out the periodic costs you expect throughout the year, then calculate how much you need to save each month to meet those obligations. Automating these savings can make the process even easier, ensuring that you consistently put aside the necessary funds without having to think about it. This simple yet effective strategy helps maintain financial stability, reducing the stress of last-minute expenses and preserving your emergency savings for true, unexpected emergencies.
To conclude
Building a diversified savings plan is key to achieving long-term financial security. By spreading your savings across different types of accounts, such as emergency funds, retirement accounts, HSAs, personal savings for short-term goals, and funds for irregular expenses, you can better handle life’s uncertainties and planned expenditures. Each account serves a specific purpose, ensuring you’re prepared for emergencies, future healthcare costs, planned purchases, and predictable but non-monthly expenses, without compromising your financial stability.
If you’re unsure where to start, pick one or two accounts you may be missing and begin building from there. Even small, consistent contributions can make a significant impact over time. And if you find the process overwhelming, don’t hesitate to consult with a financial advisor. They can offer personalized guidance to help you craft a savings plan that fits your specific needs and goals, making the path to financial readiness clearer and more achievable. Use the free advisor match tool to get matched with seasoned financial advisors who can help recommend suitable instruments to hold your savings for emergencies. Answer a few simple questions and get matched with 2 to 3 vetted financial advisors based on your requirements.
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