You’ve probably heard this before, but you need an emergency fund. An adequate emergency fund not only reduces your stress level, but also prevents you from making poor financial decisions when you’re faced with surprise expenses. We’ve compiled everything you need to know about emergency funds into one place to help you financially prepare for life’s unexpected events.
What is an emergency fund and why is having one important?
An emergency fund is a sum of money reserved for the unexpected curve balls life throws at you. Separate from your savings account that you may dip into for leisure, an emergency fund is something that you don’t touch unless, of course, it’s an emergency.
Why is an emergency fund important? The short answer is that life is unpredictable. Whether it’s medical bills, car troubles, a stock market crash, or job loss, building an emergency fund gives you financial security in a crisis.
How much money should you put in an emergency fund?
How much money should an emergency fund have? It’s different for everyone. The number of dependants you have, your monthly expenses, and the security of your job all play a role in determining the amount of money you need to put aside. Online tools, such as this emergency fund calculator, can assist you in sorting through those factors to decide how much you should save.
Our recommendation is to have at least three to six months of monthly spending in your emergency fund. However, this rule does not apply to retirees who depend on their investments for income. In this case, building an emergency fund with 12 to 24 months of income will prevent a situation where you have to sell stocks and bonds when the market is down.
Will your money be there when you need it to be?
In addition to being adequately funded, your emergency fund needs to be easily accessible. Therefore, the most important aspect of an emergency fund is its liquidity. Liquidity means you can use the money today by writing a check or swiping your debit card. When building an emergency fund, it is important to keep it in a checking account or brokerage money market account with check writing authority.
It’s better to be safe than sorry.
Understanding how to keep your money safe starts with knowing where to put it. You can protect your emergency fund by using an FDIC insured bank account, an NCUA insured credit union account, or a money market mutual fund.
How do you start building an emergency fund?
You understand what an emergency fund is and have calculated how much money you need to set aside. But, how do you go about building an emergency fund?
Setting a monthly savings goal is one way to steadily put the money you need aside. Treat your emergency fund like it is a bill that must be paid after each pay period. After a few months of doing so, the task of building an emergency fund won’t seem so daunting.
Too many people do not have a sufficient emergency fund to cope with unexpected expenses. Understanding why an emergency fund is important is a start to ensuring financial security for you and your family when a costly surprise occurs.
Lorenz Financial Services, LLC is a Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.