Credit Loan > Checking and Savings Accounts > Savings and Checking Accounts for Rainy Days

A Healthly Savings Account is Paramount Given The Unemployment Rate

The standard financial advice in regards to being prepared for sudden job loss was that you should have six months worth of expenses in your savings and checking accounts. The current advice is anywhere between eight and twelve months.

This upward revision of the emergency cushion is for two reasons. The first is that it is becoming increasingly more difficult to find new employment, and a subset of this is that if you do find a new job, it may not have the same pay rate you were accustomed to. The second reason is that employers are cutting back on benefits, which means that in absolute terms your expenses may go up – more spent on health care etc., -- even if technically they remain the same.

This cushion should cover all of your monthly expenses – rent/mortgage, health care, food, utilities, school expenditures, reasonable recreation, etc. This amount is more than many of us can conceive of saving ever, but if you can, it is wise to do so, and to make the best use of it at the same time.

That means that this money (whether it’s enough for one month or twelve) should actually be in a savings account, not in your checking. The reasoning behind this, is that savings accounts pay interest and therefore the money you have put aside for that rainy day will continue to grow in case the rain lasts longer than you expected.

Ideally this fund should be converted into CDs (so that you can’t touch the money for long periods of time no matter how much you think you need a new plasma TV) or at least placed in a high-interest savings account. These accounts pay twice or better the interest rate of a regular savings account. They usually have a minimum investment of a thousand dollars, but unless your monthly expenses are unusually low, even a single month’s worth of savings will cover that.

Even with a high interest account, one month’s worth of expenses will take a very long time to turn into two, but six months have a good chance of becoming seven or eight. Regardless, every little bit will help. Savings accounts also have advantages over checking accounts in that they move the money out of one’s immediate area of focus. No matter one’s intentions, it is far too easy to spend money that is at hand.

A savings account, especially if you deliberately set it up without ATM access, takes more deliberation to get to and that little bit of extra thought may keep you from robbing something you are keeping for future needs.