40% of US adults say they don’t have enough funds on hand to cover a $400 emergency. From unexpected car expenses, to the ever discussed “rainy day fund” there’s as many reasons to save as there are places to keep the funds.
1. Emergency fund
An emergency fund is for, well, emergencies. No matter how hard you plan, life is filled with surprises. Car in need of urgent repairs? Sudden illness requires a hospital stay? Unexpectedly lost your job? An emergency fund can be used to help you make ends meet if you incur unanticipated expenses.
An emergency fund is intended to be used at a moment’s notice. For the most part, you’ll hear that a healthy emergency fund should cover between three and six months worth of living expenses — which would include rent, mortgage, bills, food and other essentials.
Since you never know when an emergency might happen, it’s best to keep your fund relatively liquid. That means emergency funds could live in a high-yield savings account or a money market. When an emergency happens, the last thing you should be worrying about is penalties around withdrawals.
2. Medical savings fund
This is money intended to cover a medical emergency, specifically something that might not be covered by health insurance. Depending on where you choose to keep these funds, these funds could potentially be factored into an emergency savings fund.
Once again, this type of savings should be liquid so you can get in it in the case of an emergency. Depending on the type of insurance you have, you might have access to an HSA, or health savings account.
Saving limits in 2020 for a HSA are $3,550 a year as an individual or up to $7,100 for families. There’s no penalty for using your HSA to cover medical expenses. If you don’t have access to an HSA, you could choose to keep your medical savings in a separate savings account.
3. Retirement fund
We’ve all heard it before; it’s never too early to start saving for retirement. Even if you can only contribute a little bit every month, every deposit helps. However, understand that the money you invest towards retirement shouldn’t be touched until retirement.
If your company offers 401(k), consider using that, especially if they offer matching contributions. Companies often match employee contributions up to a certain percentage, and it’s worth taking advantage of the perk.
Every company is different so speak with an HR representative to see what your company offers. Another tax-advantaged saving option is an IRA.
But, don’t consider this money liquid, or in play until retirement. Withdrawing money from a 401(k) or IRA before retirement can lead to hefty tax penalties.
4. Children’s college fund
If you have a child (or children), you’re probably already considering how to pay for college. Starting early and saving little by little can make a world of difference when those admission letters start rolling in.
While there are many ways to start saving for your child’s education, a 529 college savings plan is a speciality saving account where you can take advantage of tax benefits while saving for future schooling.
Typically, you contribute to a 529 post-tax, and can withdraw the earnings tax free, as long as they’re used to pay for a qualifying educational expense. Check with your specific state to see what specific tax benefits they offer, benefits may vary from state to state.
5. Personal savings fund
A personal savings fund is where your imagination can run wild. It’s not an emergency, medical expenses, or retirement. This fund is there to help you save up for your next big financial goal — that could mean a car, vacation, or perhaps a downpayment on a home.
Based on the rate at which you’re saving for this big purchase, you probably have an idea of when you’d need the funds by. That means something like a CD might be a fit, since you know exactly how long you have to let your money grow in the account. For other goals, a high savings account might be the best fit.
