How to Build a Better Emergency Fund
May 26, 2020
At some point, nearly every adult needs the security of an emergency fund. This is money you have saved, separate from your retirement savings or personal savings, as a safety net in case of emergency. Job loss, medical expenses, or an unexpected major home repair can all be financially devastating to a family. Having assets that can quickly be accessed in cash can alleviate some of the financial stress.
How to Build an Emergency Fund
If you haven’t started an emergency fund, that’s ok. It’s never too late to begin. While 3-6 months of expenses can seem like a daunting amount to accumulate, thinking in small milestones can help get you started. Similar to saving for retirement, it’s important to build savings into your monthly budget and pay yourself first out of your take home income. Making automatic contributions monthly and building first $500, then $1000, then 1 month of expenses, and so on, can help you reach your goal. Once you’ve reached your goal, keep saving to ensure your emergency fund keeps pace with your lifestyle changes.
Traditional Emergency Fund Pros and Cons
A traditional emergency fund containing 3-6 months of expenses is most often put in a savings account that is easily accessible. In many cases, an emergency fund at the same bank as your everyday checking and savings account can mean near-instant access for a transfer into your other accounts, or even a cash withdrawal, which can mean an instant solution. Savings accounts are also quite secure, almost impervious to any market fluctuations. However, this emergency savings has a few drawbacks. First, traditional savings accounts, even high yield savings accounts, are not the best way to have your money working for you. A gain of 1-2% is very modest when that savings could be working much harder in other places. In addition, when your savings account is easily accessible, it’s also easy to “borrow” for a non-emergency situation, which is a dangerous habit.
A Better Emergency Fund Solution
Obviously having quick access to your emergency fund is key, but financial consultants may recommend having your emergency fund, once it’s complete, split into more than one spot. “Consider alternative savings methods with a higher yield, such as a money market, a Certificate of Deposit, or a Roth IRA, that can have your savings earning additional interest,” suggests debt elimination strategist, Jeff Mohlman. Having a small amount of cash on hand in an easily accessible savings account with at least 3-6 weeks of will typically give you enough time to get the rest of your emergency fund money moved into an accessible place without penalty. While these funds are not quite as quick to access in an emergency, and are more subject to market fluctuations, the interest earned can be a significant increase.
Getting the Right Advice
When it comes to making long term financial decisions, speaking with a financial consultant can help you understand the risks, tax implications, advantages, and disadvantages of every part of building an emergency fund. A professional can help you look at your assets and figure out the best strategy to keep your family in good financial shape, no matter what may happen in the future. We can help you develop a plan with attainable goals to reach your optimal emergency fund amount based on your own personal budget. Contact us today to learn more about building a successful financial future.