What, How, Why of Emergency Savings
What is an emergency savings fund? An emergency savings fund is an amount of money, not in a retirement account, that can be accessed easily to be spent on unplanned expenses. Your emergency savings fund can be held in your checking account, savings account, or even a taxable investment account allocated in a proper way knowing that you might need this money quickly, and quite possible in a down stock market.
Why should you have an emergency savings fund? An emergency savings fund allows you to pay for unplanned expenses without needing to take on credit card debt or a loan. This money could be used on any unplanned expense such as a new refrigerator, HVAC system, car repair, and the big contingency that we hedge against: a job loss. With a savings fund on tap, you are getting ahead on your finances by earning interest instead of paying interest to a bank.
So, how much money is recommended for an emergency savings fund? Work up to saving at least 6 months of your household’s total expenses, ideally, I recommend getting to 12 months. Saving 12 months of expenses is important because you might easily go through 6 months of savings in the event of a job loss before finding a new job. If that much money were to be spent, the fund would still have money left over to provide a safety net while getting back on your feet.
Lastly, how do you build up your emergency savings fund if starting from $0? Like most big things in life, start small and get started. Transfer a small amount from this coming paycheck into a savings account. Increase the amount each pay hereafter, by as much as you can, until you have saved enough for the emergency savings account to be fully funded. This may take a while, but even a small fund can allow you to pay cash for a new refrigerator! Once the fund gets to be a few thousand dollars, think about finding a high interest savings account, money market, or low risk investment that fits into your personal financial plan.
With your emergency savings fund in place (or even just started), I think you will find that it provides piece of mind and a degree of financial freedom!
This blog is for general educational purposes and does not constitute specific financial, tax, or legal advice. Please contact our firm for precise advice applicable to your personal financial situation.