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Talking To Kids About Money Matters
  • A blog written with parents in mind

Saving for a Holiday-How to Avoid Breaking the Bank

At T. Rowe Price, we often talk about the importance of having an emergency fund for those major events that you just don’t see coming, like a significant health event, major home repair, or job loss.

Our 2015 Parents, Kids & Money Survey found that 62% of parents don’t regularly contribute to or maintain an emergency fund. And 15% of those who do have an emergency fund say it would last one month or less. Below is a guide to help parents understand the importance of emergency funds and how to start saving in one:

Where to save: An emergency fund is not just another name for your savings account. To prevent you from dipping into your emergency fund for anything other than emergencies, it should ideally be a separate account that you don’t regularly access.

How much to save: A good goal for your emergency fund is to save three to six months of living expenses. But there is no need to panic about saving it all at once. Start by saving what you can into your emergency fund every month until you’ve reached your three to six months of living expenses target. This exercise should be time bound.

What to use it for: The primary purpose of an emergency fund is to provide you with the money you need so that you don’t have to raid your retirement savings or over use credit cards to get through periods of income loss or to handle a major, unexpected expense. This means you shouldn’t be using it for holiday shopping, a quick manicure, or a new gadget. If you do withdraw money from your emergency fund, remember to replace it as soon as you are able. Otherwise, the funds won’t be there the next time you need them.

How to involve your kids: Starting an emergency fund is a great time to talk to your kids about money and financial responsibility. As you’re looking for ways to trim expenses in order to defer that money to your emergency fund, explain to your kids why you skipped a weekly fast-food treat and that you’ve set a goal to save this money. This can be an easy way to start a conversation about goals they have and things they may want to save for.

While saving in an emergency fund may seem like an unnecessary move now, making it a top savings priority may be a financial lifesaver for you in the future.

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