This is a guest post from a blogger who is doing some good in the world. Catherine Burke helps those who’ve been suckered into payday loan schemes to find their way out. When she asked the kind of content she might write for you, I liked the idea of covering the emergency fund. It’s a bit of a loaded topic for residents, who are often saddled with educational debt. Does a resident actually need an emergency fund? Here’s a breakdown from Catherine.
-Barbara Hamilton, MD
You could call an emergency fund the backbone of your personal finance strategy. If an emergency arises suddenly, you will have the emergency fund to support you. That is why personal financial specialists have always endorsed having one.
In this article, the focus is on demonstrating how such a fund will work for medical residents who are getting an annual salary of $45,000 to $60,000.
“Keep the emergency fund intact in case you lose your job or income.”Michelle Singletary
For a medical trainee, directing an amount of money towards an emergency fund may not seem a practical option, but it is really important.
You don’t know what is going to happen with you tomorrow. Maybe you need money suddenly, like in the case of a sudden accident. Then the money you’ve saved in an emergency fund will come in handy.
That is why you need to save at least 3 months to 6 months’ salary in your emergency fund. Suppose, as a medical resident, your income is $60,000 per year. Then you should aim to save $15,000 to $30,000 for an emergency.
Believe me! Creating an emergency fund and saving at least 3 to 6 months’ savings is necessary for a medical trainee.
The Student Loan Hero website states that on a standard medical student loan repayment plan where the payment duration is 10 years, you have to pay a regular monthly payment of $2,300 per month on a $196,250 loan amount and 7% interest rate.
In addition, you have to pay for your food, utilities, rent, etc. You may feel like you don’t have enough money left over to save.
So, try to save some dollars in the emergency fund slowly but steadily. The amount of money is not important here. The important matter is to maintain the Emergency Fund and continue to save dollars in the Emergency Fund regularly every month.
You can say that online banks are currently a good way to store your savings. Online banks currently offer higher interest rates compared to brick and mortar banks.
So, the ideal account for keeping the money for Emergency Fund purposes is an online account.
According to the Bankrate.com report and our estimation, if you want to open an online bank account for emergency savings purposes, you can rely on 2 online banks.
These are Citibank and Vio Bank. Citibank is offering 0.90% APY (Annual Percentage Yield). You don’t need any minimum balance to open a savings account in Citibank. You’ll get access to the ATM with Citibank.
Vio Bank is offering 0.83% APY and you need a minimum of $100 to open a savings account in the Vio Bank. (Editor’s note: Ally, CapitalOne360, *Etrade, and many others offer high interest rate savings accounts. Mine is at *Etrade.)
Financial experts always suggest that you should create a separate account for emergency purposes if you already have a savings account.
The thought may arise in your mind that if you already have a savings account then where is the need to open a second bank account?
Well, the 2 accounts have different purposes. In the savings account, the money you’re going to save is for your future. The savings account will provide you financial security.
The bank account you’ll open for emergency purposes will serve your emergency purpose needs. In case, you need some money suddenly, you can instantly withdraw the cash from your emergency account.
That is why you need to strictly follow the rule that you’ll only withdraw money from the emergency fund just for emergencies that arise.
With the emergency fund, you should take care of your debts too. As a medical resident, maybe you have unsecured debts like credit card debts or a payday loan, in addition to your medical student loans. In an emergency, it is easy to depend on credit cards and payday loans to control the situation instantly. But in the long term, you’ll face problems while paying off the credit card and payday loan balance with a high-interest rate.
If you end up in this situation, you might consider consulting an expert on the repayment of credit card and the payday loan debt. You can use options like debt consolidation, card balance transfer, or payday loan consolidation to solve your problem.
Personal finance experts like Suze Orman and Dave Ramsey are quite vocal about the emergency fund.
Dave Ramsey has advised that all Americans should start by saving $1000 in an emergency fund. Once you have saved $1000, then you can aim for the larger goal of saving 3 to 6 months of your annual salary.
Suze Orman states you will be in a better position if you save 8 to 12 months of your annual salary.
So, the personal finance experts have supported the emergency fund quite vocally.
Your emergency fund is the test regarding how much you’re prepared to face an unexpected scenario. If you are generally living a paycheck-to-paycheck life, start by saving $100 each month. The best option is to use a high-yielding savings account, as previously described. You’ll be glad you have it in case of an emergency.
As Greg McBride, Chief Financial Analyst for Bankrate.com has said, “Nothing helps you more than knowing you have money tucked away for an emergency.”
What is your experience with the e-fund: do you have one? Where do you keep it? Does it help you feel financially secure?
Catherine Burke is a financial writer for Online Payday Loan Consolidation. She provides resources to help people get out of predatory debt. She lives in Kansas and has hard-won knowledge when it comes to payday loans.
The path can be riddled with failures, even if you're doing it right. In this recording, I share some of my gaffes with you.