Posted by Ryan on April 21st, 2008 in Money Management

Financial planners recommend saving 3-6 months of living expenses for an “emergency fund.” An emergency fund should be exactly that, for emergencies only. It should not be a savings account that you tap into when you find a great suit, beautiful dress, or need some extra spending money for a vacation.

So What is an Emergency Fund For?

An emergency fund should be set aside so your financial situation is not destroyed by unexpected events, which inevitably happen to all of us. A loss of job, a medical emergency, or major home repairs are a few examples. You want to be sure that you are prepared for unforeseen circumstances and don’t have to rely on a high-interest loan that can drive you deep into dept.

Where Do You Put Your Emergency Fund?

Don’t just stuff the money under your mattress. Put it to work for you, but make sure your emergency fund is in a separate account than your regular bank account. This will prevent you from being tempted to spend this money, as it is out of site out of mind.
While it may be unlikely that you have to use your emergency fund, you don’t want to tie it up in an investment that doesn’t allow you to quickly access it in the case of emergency. For that reason it is best to put this money in a high-yield online savings account, which will allow you to quickly access the cash when you need it most.

A high-yield savings account will give you the best return on your money while making it accessible at any moment. By stashing your money here, you can either quickly transfer your cash to your regular checking account or use an ATM card supplied by the online banking account when you need it. Other investments, such as a CD or mutual fund, could come with early withdrawal penalties, heavier tax implications, and could take a couple days to close the account and transfer the fund to your bank account.

What if I Don’t Have an Emergency Fund

Start saving now. Unless your income greatly exceeds your expenses, building an emergency fund will take some time. The little bit of money (or lot of money) you can contribute to your emergency fund piggybank every month will add up faster than you realize.

You might need less than you think. Remember, an emergency fund is 3-6 months of minimal living expenses, not what you typically spend every month. If you were in a real crisis, what is the least amount of money you would need to survive. This would include your rent/mortgage, utilities, food, and other bare necessities.

Millionaire Money Habit: Having an emergency fund is an intelligent way to anticipate for the unexpected, while reducing the chances of having to go deep into debt because you were unprepared. It’s important you do not tap into your emergency fund for unnecessary purchases, and that you find a way to keep it accessible and earning interest while your money sits dormant. -RT
photo by billy_verdin

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