An Emergency Fund Reduces Your Financial Risk.
Though it's importance is often overlooked... an emergency fund is a vital element of your financial security.
So important... in fact... that no financial plan or strategy should be considered complete... until and unless... it calls for the establishment of such a fund.
Having money put back for emergencies is that important.
It deserves your highest priority.
It should... in fact... be one of the very first steps taken... when implementing your
plan or strategy.
So let's consider...
What Is An Emergency Fund And Why Do You Need One?
Strickly speaking... an emergency fund is simply a savings account.
However... it is a savings account that has a very special purpose.
That purpose is... To allow you to be able to pay cash for future "emergency situations".
Unexpected situations that happen in the course of everyday life.
- Your refrigerator may go on the fritz.
- You may have to get a new set of tires for your car.
- Your central heat and air system may develop issues.
- The roof may begin to leak.
- The kids may have unexpected school expenses.
- You or your spouse may become ill and not be able to work for awhile.
- What if you lost your job?
The point is... many things in life happen unexpectedly.
And... though not in our plan... we are forced to have to deal with them.
Normally that takes money.
An emergency savings is necessary so that... you will have the money you need... when life throws you a curve ball.
Without this "rainy day" fund you may have to pull out the credit card or go to the bank and borrow money in order to be able to address your current emergency.
In other words... you will be forced to create more debt.
Not good! It is one thing to create debt of your own choosing.
It is quite another to be forced to.
Without an emergency fund... life will force you to create more debt.
An emergency fund helps you stop this debt cycle.
How Much Emergency Savings Do You Need?
My recommendation is that... initially you should move aggressively to put back at least $1,000 as soon as possible into your emergency savings account. After that... just make a reasonable monthly draft into your account.
An ideal goal... to work towards... would be to ultimately accumulate an amount equal to... three to six months of after tax income.
Such an amount should allow you to be able to pay cash for most common emergencies.
In addition... it could also provide enough cash on a short term basis to cover your living expenses should you become unemployed or temporarily unable to work.
To evaluate how long it will take you to reach your "emergency savings goal" based on your monthly rate of savings... use the calculator provided by the following link.
Carefully read the link instructions before clicking to the calculator.
First click here.
Then select the "Savings Calculator".
Now that you have quantified your emergency fund goal and you have determined how much to save monthly into the account ... the question becomes...
What Is The Best Type Of Account To Use For Your Emergency Savings?
You should open a "Money Market" account for your emergency fund savings.
Money Market accounts are an ideal choice because...
- They are very safe.
- Your money is available at any time (liquid).
- Historically they have paid a higher rate of interest than bank savings accounts.
- Normally you can write a check on the account.
Never put your emergency savings into any investment or account that ties your money up for long periods of time... a CD (certificate of deposit) for example.
You must have immediate access (liquidity) to the money in this account in case of an emergency.
Keep this account separate from any other savings account that you may have. Do not mix accounts.
Mixing this account with another savings account will increase the chances that the money will get spent for other purposes. Thus leaving you again at risk... when unplanned emergencies happen.
Some money market providers require an initial deposit of some sort in order to open the account.
However, many providers will waive the initial deposit providing you set up an automatic bank draft into the account.
Which... by the way... is exactly what you should do. Set your account up to draft automatically each month into the account.
This is crucial... if you do not make your monthly emergency fund savings automatic (via bank draft)... rest assured... it won't happen.
You will not save consistently on your own.
Be honest now... you know it's true.
Something will come up and you will choose to not save into your emergency fund... just this once.
Now we all know that if we choose not to save once... it will be that much easier to choose not to save again.
Your need for an emergency fund is much too important to leave to monthly choice. Make it automatic and... it will happen.
The often overlooked emergency fund is a simple... yet critical tool... you should be using to reduce your overall risk and to help stop the debt cycle.
"Because It Matters"... Jim
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