Have you ever had one of those months? The water heater stops heating, the dishwasher stops washing, and your family ends up on a first-name basis with the nurse at urgent care. Then, as you're driving to work you see smoke seeping out from under your hood. Bad things happen to the best of us, and instead of conveniently spacing themselves out, they almost always come in waves. The important thing is to have a financial life preserver, in the form of an emergency cash fund, at the ready.
Although many people agree that an emergency fund is an essential resource, they're not sure how much to save or where to keep the money. Others wonder how they can find any extra cash to sock away. Some don’t have any emergency savings at all.
How Much Money?
When starting an emergency fund, you'll want to set a target amount. But how much is enough? Unfortunately, there is no "one-size-fits-all" answer. The ideal amount for your emergency fund may depend on your financial situation and lifestyle. For example, if you own your home or provide for dependents, you may be more likely to face financial emergencies. And if the crisis you encounter is a job loss or injury that affects your income, you may need to depend on your emergency fund for an extended period.
How Can I Find It?
If saving several months of income seems an unreasonable goal, don’t despair. Start with a more modest target, such as saving $1,000. Build your savings at regular intervals, a bit at a time. It may help to treat the transaction like a bill you pay each month. Consider setting up an automatic monthly transfer to make self-discipline a matter of course.
You may want to consider paying off any credit card debt before you begin saving. Once you see your savings begin to build, you may be tempted to use the account for something other than an emergency. Don't. Try to budget and prepare separately for more significant expenses you know are coming. Keep your emergency money separate from your checking account so that it's harder to dip into.
Where Do I Put It?
An emergency fund should be easily accessible, which is why many people choose traditional bank savings accounts. Savings accounts typically offer modest rates of return but are insured by The Federal Deposit Insurance Corporation up to $250,000 per depositor, per institution in principal and interest.
The only thing you can know about unexpected expenses is that they're coming — for everyone. But having an emergency fund may help alleviate the stress and worry associated with a financial crisis. If your emergency savings are not adequate, consider taking steps today to create a cushion for the future.
An independent financial advisor can be a trusted ally who can facilitate putting a sound personal financial plan in place today to help you have a more financially secure tomorrow. Have questions? Get in touch today!
Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.