Preparing for your financial future can be difficult because you need to consider so many things. You have to pay your bills, save for the future and prepare for emergencies. But how do you prepare for the future when there’s so much money to be spent?
Creating a languishing or emergency fund is your best bet, and you can try several ways to save these funds and build a nest egg that can be used for a variety of purposes or expenses.
Why Do You Need an Emergency Fund?
You need an emergency or languishing funds account because emergencies happen. The average American doesn’t have $400 saved for emergencies and that should give you reason to spring into action. Without emergency funds, you turn to credit cards, borrow from friends and family or worse.
Plus, these funds allow you to invest and earn money with your money. Every little thing you can do to improve your financial situation makes a difference, and you can make simple investments that give you more money to work with. You can invest in treasury bonds, stocks, ETFs or crypto.
How Much Languishing Cash Do You Need?
Prevailing wisdom varies on how much money you need in a languishing or emergency account. You might choose to carry an amount equivalent to:
- A month of salary
- 3 months of salary
- 6 months of salary
- Your homeowners insurance deductible
- Your auto insurance deductible
- Your property taxes for the year
- $1,000 for emergencies
- A series of yearly expenses for which you must save: ad valorem taxes on your car, school fees, children’s activities.
Irrespective of how you begin saving money or how much you believe you need, more is better. Over time, you may turn this account into a catch-all that pays for rainy day expenses and emergencies. You might also open a completely separate account just for entertainment or rainy day purchases.
In either case, keep a ledger that explains where the money is coming from, where it’s going and a running total.
How to Earn Interest on Your Emergency Fund
Want to earn as much as 7.12% on your emergency or languishing funds? High-yield savings accounts and money market accounts from your bank pay a fraction of a percent in annual interest; even 10-year Certificates of Deposit only pay about 3%.
Meanwhile in January 2022, government-issued Series I Savings Bonds — I Bonds — pay a composite, temporary interest rate of 7.12%.
Earning interest on your emergency fund is a good way to grow money you want to keep relatively liquid — available to use — in case you need it. You can easily buy U.S. Treasury bonds and cash them in if you need them. I Bonds mature in 30 years, so in that way they represent a longer-term investment, but you can still earn a low-risk return through these even if you hold them for far less than 30 years.
Making your money work for you is a good first step in increasing your net worth, building wealth and protecting yourself financially.
How to Buy I Bonds
Anyone can buy I Bonds so long as they are a:
- U.S. citizen ashore or abroad
- Civilian employee of the federal government anywhere in the world
- Current U.S. resident
You purchase I Bonds through TreasuryDirect.gov or in paper form with your income tax refund. You pay face value for the bond, and it collects interest as mentioned above. In a single year, you can purchase up to $10,000 in electronic bonds or $5,000 in paper bonds.
You can also purchase bonds as a gift for any TreasuryDirect user, or you can request paper bonds for anyone and they will be mailed to you. Generally, you purchase the bonds in your name because you plan to cash them in the future,
Additionally, adults can buy bonds on behalf of children. Other entities such as trusts and estates can purchase bonds under certain conditions. Corporations and partnerships cannot purchase bonds.
An estate or a trust established by your estate can also purchase I Bonds designated as:
- Single ownership
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Start an Emergency Fund Today
You can start an emergency fund today using these tips, but you’ll want to create a plan that includes the right amount of money you are trying to save. Calculate the money you need for future purchases, save as much as you can and set yourself up to enjoy stronger financial security.
Frequently Asked Questions
How much money should be in your emergency fund?
While conventional wisdom has changed over the years, most financial experts would advise you to keep at least 6 months of salary in an emergency fund. However, you might keep specific amounts of money in your languishing funds account to pay for property taxes, yearly purchases or regular expenses.
Do you pay taxes on bonds?
Yes. Generally, you pay federal income tax on your savings bonds, but you may be exempt from state taxes. Reach out to an accountant for further assistance.