Emergency Fund: Why You Should Have One
Many people young and old, working or retired, don’t have enough saved up for an emergency. It spreads the whole spectrum, from those who work paycheck to paycheck and those who are making large sums of money. Have you ever asked yourself, where you’d get the money if you had an emergency come up? According to the FINRA Investor Education Foundation National Financial Capability Study in 2012, 56% of people didn’t have savings to cover at least 3 months of expenses.
What are emergency funds for?
Job loss
Medical expense
Unexpected home repairs
Car troubles
Unexpected bills
Benefits of having an emergency fund
Keeps stress down - less worry knowing you have a safety net.
Avoid spending on a whim - Keeping your emergency fund an arm lengths away instead of in your pocket makes you second guess spending that emergency fund on things you don’t really need.
Keeps you from making bad financial decisions - When your in a bind, you’ll do anything to get your head above water. This includes taking out quick and high interest debt, like credit cards and other loans. By having an emergency fund, you have a safe no interest way to get out of trouble.
Other Questions
How much should you have in an emergency fund?
Everyone is different, but generally it’s recommended to have between 3-6 months of living expenses. If it takes you $3,000 a month to live, you need between $9,000-$18,000 in emergency funds as an example.
What if you have other financial goals?
If you have big expenses coming in the future, it’s fine to keep more than the recommended amount of savings to prepare for the expense. Just make sure you’re money isn’t losing to inflation if it’s a long term goal you’re trying to achieve.
Where should you keep your emergency fund?
It’s important for the emergency fund to be fully liquid and easily accessible. For some, it’s advisable to keep the money where it takes a step to get. Meaning, not having it in your checking account where you can spend through it easily. anything under 6 months of savings needs should be in a very conservative account like a liquid money market account, savings account, or conservative and liquid fixed income investments. Anything above this amount that your saving for a longer term, it’s important to have invested. The risk tolerance all goes back to how long and when you will need the money.