Emergency Fund: 101
What is an Emergency Fund?
ou may be familiar with the term, “Emergency Fund,” as it relates to personal finance. Essentially, this is money that has been set aside to support you and your family during times of unexpected expenses. It is a safety net of sorts. And it is something that many people know about, but do not necessarily establish.
So, let’s take a look at how an Emergency Fund can serve as a valued safety net. Throughout a typical day, we tend to make preparations that will support our day-to-day activities such as packing an umbrella in case it rains or carrying a spare tire in the trunk of a car in case of a flat. It would seem prudent, in turn, to do the same as it comes to our personal finances.
How does this apply to me?
Situations that may arise could range from repairing a roof leak to needing a new car or incurring medical bills. There is also the possibility of a fender bender while you are driving or some level of storm damage to your home. In fact, there are a whole host of situations that may require an unexpected outlay of cash that makes it practical to have money set aside to be able to cover such costs.
How much should I set aside?
Typically, it is advisable to have anywhere from three to six months worth of your overhead or expenses in liquid assets – meaning cash or cash equivalents. If you have a family, it may provide more comfort to have at least six months worth in easily accessible assets. In addition, it is not uncommon for an emergency fund to include whatever your homeowners and/or auto deductible is, in case of a triggering event.
How should I save for an Emergency Fund?
There are a few ways that one may save or set money aside to increase their emergency fund/savings. It may be helpful to view this money as another bill or expense that is set aside every paycheck or every month. Often times, setting money side on autopilot provides a hands-off approach that can ease the burden of “trying to save”. Someone may use their tax refund, inheritance or any cash gifts or year-end bonus received to add to this emergency bucket as well.
Should I create a separate account from my savings?
This is something that may be a personal decision and vary from one individual to another. Some people may find it is cleaner to have an emergency fund completely separate from their savings, to provide a level of clarification between their use. Of course, simply adding an emergency fund to your savings may work just as well for you. It is a personal decision based on your life, saving habits, family, and cash flow among many other factors.
The bottom line…
Despite our best efforts, life does not always go according to plan. What we can take control of is preparing for the unexpected and striving to make things easier along the way. We believe that regardless of age, there should be a portion of your money set aside as a safety net to support one’s life. If you have any questions about your own situation, we are eager and ready to discuss what might be uniquely suitable for you.