What is an emergency fund?
An emergency fund is money kept in your savings or checking account for the sole reason of offsetting unplanned and urgent expenditures.
In simple words, an emergency fund is money you set aside so that it helps you when you are on a tight spot money-wise.
In its true form, an emergency fund is a form of savings meant for the worst-case scenario. The just-in-case scenarios.
Do I need an emergency fund?
Personal finance experts agree that everyone needs an emergency fund regardless of their financial situation.
What if I am in debt? You will still need an emergency account even so.
Even when you are doing well in life, the emergency account is still a must-have. No one knows what tomorrow holds in store for them.
When do I need an emergency fund?
Watch this short video first (1:42 mins).
Life is unpredictable.
It is therefore prudent to stash away enough money to cover you in such trying moments when they surface.
Getting ill suddenly and your insurance provider refuses to foot in the bill. This may be the case when your insurer thinks you put yourself to risk in the first place resulting in you being ill. Or your situation not included in your current cover.
The manager at your day job thinks the economy is biting hard and transfers that to you. You get laid off or your salary slashed by half.
Or you wake up one day and get your precious car, not in your garage. Stolen! Will you stop going to work until you save enough to buy a new one?
These are the times your emergency fund kitty comes to your rescue.
Not having one is unwise. It will not only land you into another debt but make your life a living hell.
How do I keep my emergency fund?
Where do I keep my emergency funds to reap the maximum benefits?
Here are the best places to keep your emergency funds.
High yielding bank accounts
A high yielding savings account should be the first priority for your emergency fund.
It’s because these accounts by default are readily accessible to you.
All you have to do go to your nearest ATM or bank branch when you need your funds and you have it.
The benefit that comes with a high yielding savings account is the amount of interest you earn.
Over time, your initial deposit grows and compounds every month.
Different banks offer different interest rates. You should look for one with the most lucrative and competitive rates in the market.
Take into account,
- the availability of monthly fee charge
- Minimum balance requirement.
- And other pecks like welcome bonuses.
If I were you, I would go for a well-balanced bank account.
It should have no minimum balance rule. No monthly or annual fee charges. And offers a welcome bonus to its clientele.
Money markets are almost similar to the savings account.
They are the best option if you want higher returns for your savings. Sometimes you can earn up to 6 times more than your normal savings account.
Opening one is as easy as opening a savings or checking account. You can do it online or ask your nearest bank branch.
And like every other financial product, keep your eyes open for the best bargain.
Take your time to shop around. Compare fees and features before you decide on sign up for one that best suits your goals and aspiration.
Ooh! And I should let you know that your money in money markets is easy to withdraw. You can do it right away via your nearest ATM machine or the web-based interface.
Certificates of deposits
You can also save your emergency fund under the certificates of deposit account (CDs).
You can do this at your local bank branch or an online account.
I, however, do not encourage you to take this option for your emergency fund savings due to its urgent nature.
This is what CD accounts do to your money:
It locks your money for a fixed period of time where you are never allowed to withdraw anything, no matter what. This will inconvenience you a great deal.
The emergency funds are meant for emergencies and therefore are urgent in their nature.
If you decide to withdraw before maturity you risk accruing penalties.
The penalties will leave you with less money than the one you saved.
The Individual Retirement Account (IRA)
Can you put your emergency fund under the IRA care? Yes you can.
Is it a smart move? Nope!
Without wasting must time, you should not put your money into an IRA. This is meant for long term investments like retirement. Chapter closed.
Is $1000 Emergency Fund enough?
It depends on your situation in life, your financial goals, and life aspirations.
Personal finance experts advise you shelve at least $1000 dollars in your emergency fund account on the lower end.
It is the most sizable and sound amount to save when you are in a tight spot financially. Whether you are in debt, your income too low or even overstretched, name it.
As your income situation improves over time, you can stash away 3 to 6 months’ worth of your monthly spending.
It is, however, safe to have 6 months to one years’ worth of average monthly spending save as your emergency fund. This is money enough to cushion you for the whole year worth of spending in case things go south.
It is also helpful in case of many bad things happening to you all at once, like losing your job and getting ill.
What is the reasonable emergency fund amount?
According to the Bureau of Labor Statistics, the average household spends $57,311 a year.
Basing on 6 months to one-year savings, this translates to $28,655 to $57,311 dollars for average American. So, where do you fare on in this?
I am already in debt. Do I still need an emergency fund?
Let’s say you don’t.
An economic downturn bites your industry. It ends up eroding financial gains faster than anticipated. (like the financial crisis of 2008)
With your degree and specialized skills, you occupy a crucial position in the company. Firing you is not an option given that it will be undesirable for the long term survival of the company.
So you are safe.
But, the employer cannot foot in your full salary and allow the firm to go bankrupt.
In the meantime, he decides to slash everyone’s salary including his or hers by a sizable margin. Let’s say by half.
You will still need to pay for the student loan, car loan and recently had a mortgage nevertheless.
These and many others are the instances demand you have an emergency fund as early in life as possible.
If you had set up a sinking fund to serve your emergency account, then, you are bound to come out of such and many other stressful moments unharmed.
Keep in mind,
…the more you sweat in times of peace, the less you bleed in times of warNorman Schwarzkopf
So, do you need an emergency fund? Of course, you do.