Emergency Fund 101
Categories: Family & Money
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Our parents taught us to prepare for a rainy day, but what if that rainy day came tomorrow…would you and your family be able to survive financially if you lost a job, got sick, or faced an unexpected emergency?
A recent survey shows that 1 out of every 3 Americans have NO emergency fund set aside.
If you don't see how critically important an emergency fund is to your financial well-being, then you haven't been paying attention the last few years!
The volatile stock market, a skittish economy and an anemic job market remind us that it's more important than ever to be ready for any personal financial emergency.
So let's talk about how to get started, how much you need to save and where to stash that rainy day fund for safe keeping.
As a rule of thumb, you should have three to six months of your income in reserve for an emergency.
We know that can sound like a lot especially if you don't have any money set aside or if your budget is tight. The key is to start now and put aside as much as you can. Establishing this emergency fund should be your #1 priority.
Once your emergency "cushion" is in place, you can worry about saving for your more long-term goals such as a financially secure retirement or college tuition.
Where to Stash Your Emergency Funds
Some financial pundits will recommend stashing your emergency funds in stocks, mutual funds, bonds, gold, etc.—NOT US!
Higher return equals higher risk…that's a fact.
Conservative and ultra-safe is the most appropriate investment strategy here.
After all, the idea isn't to make money on your savings, it's to keep it safe and available in an emergency.
No, a safe investment like a Certificate of Deposit won't make you rich, but it's better than stuffing the money under your mattress! And you can boost your rate by shopping around for the best rates offered.
The most complete sources of information for a liquid and safe emergency fund are: www.MyBankTracker.com and www.bankrate.com.
Keeping in mind that your emergency account must be reliable and accessible, here are some options for where to stash that money away:
Option 1: Savings account at your local bank or credit union.
Option 2: Money market account at your bank, mutual fund company or broker.
Option 3: Certificates of Deposit (CDs).
We believe certificates of deposit are appropriate for some emergency funds. Yes, they lack some liquidity because of early withdrawal penalties, but some banks are offering no-penalty CDs that allow withdrawals at no charge.
Plus, some bank's longer-term rates are so attractive, relatively speaking, that paying the penalty (in some cases a penalty of 60 days interest) may be worth it.
No get-rich-quick schemes here, no "silver bullet" investment recommendations that will make you a bundle, but keep in mind that the primary goal of your emergency fund is to give you the peace of mind that if you unexpectedly need the money, it's there.
Don't have enough left over at the end of every month to set money aside for your emergency fund? We can help. Check these out:
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