Many people have unexpected emergencies that require having the funds necessary to cover resulting expenses. This could be anything from home plumbing issues to car repairs and more. When people have built up a sufficient amount of money in an emergency savings fund, these types of unanticipated emergencies won’t affect their budget.
Emergency Savings Fund
This is a way a person can prepare for the unanticipated financial problems that may happen in the future. It should be designed to cover individuals financial shortfalls when unanticipated expenses occur. The funds need to be reliable and provide individuals with quick and easy access. A savings account is a good option. Mutual funds, stocks, and other investment type products may not be as good for emergency funds. Money in an emergency fund should be anticipated to stay there for the long-term.
In the financial world, investments often provide a return based on their level of risk. This means the money put in an emergency fund should be placed in a low-interest bearing account. Experts recommend people consider cash, savings or checking accounts, CDs and even money markets. It’s important the banks or other financial institutions where emergency savings are kept be FDIC insured.
Long-Term or Short-Term
A short-term emergency fund should be able to cover immediate financial emergencies. This could be used to replace major appliances such as a dishwasher, television and more. This can also be used to cover a temporary loss of income that could happen at any time. A long-term emergency fund is designed to cover larger emergencies. This could involve such things as the loss of a job as well as a natural disaster such as a flood, earthquake or more. It may be okay to have this money in an account that takes a few days to liquidate, but provides a higher rate of return. A short-term emergency fund can be used to cover expenses until access to the long-term emergency fund is possible.
Size Of Emergency Fund
Many personal finance experts recommend that individuals have a minimum of six months worth of expenses available to handle most emergencies. This will involve adding up what is spent each month and multiplying it by six. If a person’s budget fluctuates during the year, they can determine their needs by taking their household’s most expensive month and multiplying it by six. An emergency savings fund should be large enough to cover all living expenses and incidentals for a six month period.
It’s important to make regular payments to an emergency savings fund until it reaches the necessary level. It is important to treat the payments going to the account the same as a monthly expense. Some people have had success using an automated investing or payment method, so the money goes right into their emergency savings fund. Other people will automatically put any extra money left over at the end of the month into their emergency savings fund. Most people have success when they make putting money into their emergency fund a priority.
Only Emergency Situations
Too many times people with an emergency savings fund give into the temptation to use it for something other than an emergency. It’s too easy to see something in a store and use funds from the emergency savings account to cover it. People often tell themselves they will replace the money they’ve taken out. If this is not done, it could cause serious problems when an actual emergency occurs. Many people avoid this by having the bank card or checks to the emergency account hidden away. It’s best in most cases, to find a way to limit access to the emergency savings fund.
Maintaining a minimum of six months expenses in an emergency savings fund can mean the difference between surviving a financial emergency or being negatively affected by it. The ability to pay household bills for several months can provide people with time they will need to handle what they are facing. It is a way to prevent a bad situation from becoming much worse.
By: Kevin Faber