An emergency fund has always been important, but it seems to be even more true in today’s day and age of economic uncertainty. Without this, you could find yourself one emergency away from a financial disaster that will put serious strain on your life.
Fortunately, once you clear the air and set a strategy, you’ll find yourself on the right path. Here are several of the most important questions to answer regarding your emergency fund.
1. Why do you need it?
The name says it all. You need an emergency fund so that an emergency doesn’t force you to dip into other accounts, such as those saved for retirement. Just the same, an emergency fund can save you from having to take out a loan or rely on a credit card.
2. How much money is enough?
There’s no right or wrong answer as it depends largely on your financial circumstances and lifestyle. As a general rule of thumb, shoot for six to 12 months of living expenses. So, if your monthly expenses tally $5,000, an emergency fund of $30,000 to $60,000 is a good start. From there, you can decide if you should add more.
3. Where should you keep your funds?
The best place to keep an emergency fund is in a savings or money market account. There are two reasons for this. First, the money is easily accessible. If you have an emergency right now that calls for a large chunk of money, you can access funds within a matter of minutes.
Secondly, a savings or money market account allows you to earn interest on your balance. If you’re going to save a large amount of money, you might as well earn as much interest on it as you can.
4. When should you use your funds?
Answering this question starts with defining the word “emergency.” This varies from person to person, but think about things such as: a major home repair, medical emergency, vehicle repair, or to help a loved one in financial trouble.
Don’t get ahead of yourself. Before you take money from your emergency fund, be sure that it makes sense to do so. Consider all your other options, compare the pros and cons, and then decide what comes next.
These are the types of questions that will help you better understand what an emergency fund is, why it’s important, and how to use it to your advantage.
If you have an emergency fund, you’re on the right track. Review it to ensure that you have enough money available to you. Conversely, if you’ve yet to start an emergency fund, there’s never been a better time to take action.
What are your thoughts on having an emergency fund? What is your current situation? Is your emergency account fully funded or are you in the process of growing it?