In honor of Financial Literacy Month, we are going to chat & chew about an important financial topic: emergency funds.
The concept of an emergency fund is one of the bedrocks of a solid financial plan. Hopefully it will never need to be tapped, but in order to ensure that any unplanned expenses are covered, it is often advised to keep a cash fund equal to approximately 3-6 months of income.
Why would you need an emergency fund? There are two different schools of thought regarding the necessity for an Emergency Fund.
The first is unplanned or extraordinary expenses. Maybe a roof needs to be fixed, a medical emergency arises or some other unexpected cost needs to be covered. The basic idea is that if an out of the ordinary expense needs to be paid, having cash on hand is better than invading retirement funds or your investments.
The second is if you should unexpectedly become unemployed. Having 3-6 months of your previous income socked away will help soften the blow as you look for a new job. While unemployment/disability benefits may cover some of your expenses, they certainly will not cover all of them. Losing a job can be an extremely stressful time. Having enough funds to cover everyday expenses will keep you from utilizing high interest rate products like credit cards that may continue to haunt you in the future. By keeping money on hand, it may help to make a stressful situation less challenging.
So, what is the best way to make this happen? On a systematic basis over time, deposit money to your bank or brokerage account and make a note/commitment that those funds are segregated for use as an emergency fund. Better yet, have it done automatically. Many banks allow you to set up automatic transfers to another savings account. If it’s already set up and you don’t see it happen, your spending habits should adjust accordingly. Once you reach the level that you are comfortable with – just forget those funds are even there. If nothing comes up in the future, you can consider taking some of those funds and moving them over to your investment or retirement account.
If you are interested in learning more about financial planning and an examples of planning and Emergency fund – click on over to Mission Financial Solutions.
Source: Mission Financial Solutions
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