Do you have an Emergency Fund yet?
If your answer is No or Not Really, you are in the same position as almost half of Americans.
No one plans to need an Emergency Fund, but it’s important to have one. If you plan ahead, you can avoid serious financial problems by having some money set aside for the unexpected events in life.
Read more to learn about 3 types of funds and why you need them.
Why should you have an Emergency Fund?
Having an Emergency fund set-up and accessible helps make any issue that arises, less stressful simply because you are financially prepared for it.
Using an Emergency Fund when needed, saves you from having to borrow that money. Borrowing would end up costing you more due to interest charges or having to dip into your retirement savings.
Your Emergency Fund is your money which can earn you interest. While you keep your fund saved for peace of mind, your money is working for you.
If you never use your Emergency Fund, you still have it! You have more money set aside earning interest, to use any way you want in the future.
3 Types of Emergency Funds to Create
Being able to save and put aside part of what you earn is a good habit to begin when you are young. If you haven’t already opened savings accounts, then anytime is a good time to start.
I recommend more than one kind of Emergency Fund to have available.
I like to be prepared for any financial issue that may arise.
My 3 funds are:
Big Emergency Fund
Small Emergency Fund
Why do you need the Big Emergency Fund?
Are you financially prepared for a Big Emergency? If you lose your job tomorrow, are you able to pay your bills and support your family for a few months until you get a new job? What if you become ill or disabled and are unable to work? You will need some type of an emergency fund. You need some money saved so that you are prepared for the unexpected.
There are many expert opinions on how many months of money you will need. Their opinions vary from 2 months to 1 year, but most say 3-6 months is good planning.
The trick for an Emergency Fund is don’t wait until you have an emergency to think about starting one! Most likely, if you have a small financial issue, you will borrow from a credit card or relative to help solve the immediate problem. The lesson is to learn to be more prepared for next time. Take a little money, set it aside and add to it monthly.
If you get “too much” money in your emergency fund, good for you! You can divide it and use some for something special like a vacation or you can choose to invest it in a more aggressive fund to earn some higher interest rates.
Why do you need the Small Emergency Fund?
- Your oil burner breaks and needs repair or replacement.
- Your car brakes need replacing before your car can pass inspection.
- Your refrigerator or washing machine suddenly gives out.
- Your basement is filling with water due to a broken pipe.
- A medical issue comes up and insurance doesn’t cover the full cost.
- Your pet has an expensive veterinary visit and you don’t have pet insurance.
There are endless possibilities of unexpected expenses that occur….
Although it is possible to put these unplanned costs on a credit card, you want to avoid paying high interest rates. What if one small emergency is followed a short time later by a bigger more expensive emergency?
Small Emergency Fund – Having some money in a savings account to cover unexpected costs is good planning. A broken washing machine, leaky roof or new tires for your car can add more stress if you were already on a tight budget. It can be so easy to just put these costs on a credit card, but don’t! You don’t want to be hit with big finance charges if you can’t pay the whole bill that month. This is a good fund to keep in your savings account for easy access, as long as you don’t keep borrowing from it.
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Why do you need the Cash Fund?
This is a very practical fund that helps avoid small problems and sometimes saves money that you weren’t planning on spending. I like to keep some cash in the house for unplanned things that come up. I have a small bills stash that I use for tipping the pizza or oil delivery guy. This cash is also good field trip or lunch money if you have children.
This fund is particularly important for parents of teenagers. My young teens constantly have their hand out wanting cash for something. The older teens who have jobs and their own money, still prefer to spend my money instead of their own! Rather than handing my kids $20s from the cash machine, I prefer having smaller bills to give them instead. This also forces my kids to pay attention to prices and learn a little budgeting. I make them estimate how much they will need. Not that you need to have a stockpile of cash under your mattress, but keeping some cash in the house is smart planning.
How Much to Save?
Experts recommend having anywhere from 3 to 6 months of money set aside to pay all your expenses. An important consideration is whether you are a one or two income household. If you have two income earners, 3 months of expenses is suggested if one person becomes unable to work. Six months’ worth of emergency savings is a good idea if you are only a one income household.
For a small emergency fund, it depends on whatever you are able to keep comfortably in your savings or Money Market account. $500 may cover some car maintenance but may not be enough for a major plumbing or electrical repair.
Where to put your Emergency Funds?
The most important detail of your emergency fund is that it be available quickly to you. Keep in mind, Retirement funds and pensions are Not considered Emergency funds because they are not readily accessible before you retire. A true Emergency Fund is easy to get access to on short notice with no penalty.
I keep my funds in different accounts for various reasons. I don’t plan on needing to use my emergency funds so I like them to earn some interest. My preference is to keep part in a Money Market Fund earning some interest and the rest in a Mutual Fund earning real interest. I don’t want my money just sitting and not working for me. Although there is more risk involved in a mutual fund, it has worked out very well for me.
Small Emergency Fund
My small fund is in my Money Market Account that is attached to my checking account. It earns just a small bit of interest but it is available always. If I need money, I can make a transfer immediately. I barely remember when I didn’t use online banking and I can’t imagine not having the convenience. Using my phone, I can transfer funds instantly if needed.
Big Emergency Fund
I prefer to keep money in a Mutual Fund so that it is earning Real Interest at stock Market rates. This is not an FDIC insured account, so there is risk involved. At the same time, I’m creating my Emergency Fund, I can earn money from my own money – I like that a lot! For many years I have been putting away money every month with an automatic transfer. All this time, I have been able to earn thousands of dollars in a passive income stream. If I never need to use my emergency money it is still available for vacation or travel.
The most important detail is don’t tell anyone where you hide the money! Yes, even your spouse! I change my hiding spots from time to time so no one knows where my stash is, and yes, I have actually used the cookie jar!
Having some extra cash hidden in my wallet has been a life saver when I don’t have time to stop at the cash machine.
I also think its always a great idea a little cash in your car for emergencies. There are often those little emergencies like leaving your purse or wallet at home or forgetting to buy gas.
If you have already started your emergency fund you are on the right track. If not, don’t wait for an Emergency to happen!