Have an Emergency Fund

Why do I need an emergency fund?
Once you’ve mastered the art of consistently spending less than you make, what should you do with the savings?

  1. Invest it in stocks?
  2. Set up a CD ladder?
  3. Buy a boat?
  4. Put it into a savings account

Give yourself a pat on the back if you answered anything but 3 (if you did answer 3, here’s a link to a debt councilor).

Depending on your risk tolerance and specific needs, your emergency fund can take a couple different forms. By definition, an emergency is a situation where you need cash quickly. It could be anything from a flat tire to the zombie apocalypse. The idea is to have quick access to cash so you don’t need to take on debt (especially high-interest credit card debt) to get through the emergency.

Case in point: on January 29, 2016 at about 1:30 am, someone destroyed my car. Sniff. Don’t judge me. Yes, I know a Scion xB is not a car to get teary-eyed over. Because we have cash on hand, we didn’t panic. We rented a car while the claim was being processed. And, we had enough cash to make a significant down payment on our replacement vehicle even before the claim was paid out. This brings us to point 2:

How much should I keep in my emergency fund?
Most folks will suggest 3-6 months of expenses, depending on your risk tolerance. I tend to lean more towards 6 months, and I consider it a joint emergency/opportunity fund (more on that in another post).

Where should I keep it?
Again, I think there is some wiggle room here depending on your specific situation. I would absolutely keep at least 3 months of expenses in a savings account. It’s secure, ready to use at a moments’ notice, and may even earn a smidgen of interest to ward off inflation. Depending on your personal risk factors, you may want more cash readily available. Once you have months 1-3 set aside in savings, what next?

For months 3-6 and beyond, i think you have some more options. Savings is the easy answer. But that may feel like you’re losing money realtor to inflation. A Certificate of Deposit (CD) ladder may be an option where you trade some liquidity for a bit more interest. I would also consider a low risk bond ladder or fund as another way to keep emergency/opportunity funds (likely a subject for a future post).

Regardless of how you store your emergency fund, it is critical to have one to avoid taking on debt when you have a different, unanticipated expense. How much do you keep in your emergency fund? What type of vehicle do you use?

 

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