Factors to Consider When Setting Up an Emergency Fund

You know that an essential part of your financial health is having an emergency fund of some sort. Creating an emergency savings plan to help you through difficult times is important. Your emergency fund can help you make housing payments, buy food and pay for utilities. If you want true financial freedom, you have to have an emergency fund. Before you set up your emergency fund, though, consider the following:

Stop Worrying So Much About Growth

First of all, it is important to understand the purpose of an emergency fund. Your emergency savings are designated for use in a true emergency. While it would be nice to be earning higher returns on that money, the purpose of an emergency fund is not to provide you with income, nor is it meant to help you build a nest egg. Once you build an emergency fund to the point where it meets your goal of covering three, six, nine, 12, or 18 months worth of expenses, you just let it sit. It’s a safety net.

Safety

Your emergency fund should be in a safe place. The whole point is that you have a reserve that can be called upon. Sticking your emergency savings in stocks — and watching the losses pile up when you might need that money — doesn’t really fulfill the purpose. Safe places for an emergency fund include savings accounts and CDs that are in FDIC-insured accounts. You can also consider Ginnie Mae funds that are backed by the U.S. government. The problem with Ginnie Mae funds for an emergency, though, is that if your emergency happens when the fund is down, you might have to take a loss. Plus, you will have to pay fees on any sort of fund that you use for emergency savings. Safety means that you will get a smaller return. However, you can shop around within those safe options for higher yields.

Accessibility

You have to make sure that your emergency fund is accessible. You want to be able get the money when you need it. This means checking the withdrawal rules for any savings account you put money into, since many have limits on the number of withdrawals you can take each month (usually three or six withdrawals per month). CDs can be helpful, and they usually offer higher returns that savings accounts, but accessibility can be a problem. You might want to set up a ladder for a portion of your emergency savings so that money becomes available, penalty-free, at predictable and usable intervals. One nice thing about Ginnie Mae funds for emergencies is that some funds offer check writing and other withdrawal privileges so that your money is accessible.

Another consideration with accessibility is how you get to your money. The nice thing about a savings account is that you can usually use an ATM card to get the money if you need it, or effect a quick and painless transfer to your checking account. Other types of emergency funds might require a few more hoops to jump through, limiting how quickly you can get the money you need.

You can, of course, spread your emergency savings around so that you keep some of it in a high accessible savings account, able to hold you over until you can access a CD or some other less immediately accessible source.

Peace of Mind

In the end, your emergency fund is all about peace of mind. You want to feel confident that you can take of things should some sort of financial hardship come up. In order to have the peace of mind, you need to make sure that your emergency savings are in some kind of guaranteed account, and that you will be able to access it, with little to no penalty, when you need it.

Comments

  1. says

    I think maintaining proper budget is also a way to save some money and add it to your emergency fund. It is not necessary that you invest somewhere and create an emergency fund. You can always save money from your monthly budget to meet unexpected financial crisis.

  2. says

    I have read that it also makes sense to keep some of your emergency dollars in cash at home. I agree which is why I keep a small percentage of my emergency fund at home.

  3. says

    I think you make a good point, Money Obedience! You should have some cash kept in a safe place in your home, just in case power is down or you can’t get to your bank or ATM to pull the money out. However, it is important to use some caution, since you don’t want that money to be stolen or ruined in some disaster.

  4. Recessionista says

    I think its a good idea to have some cash on hand for emergencies as well, however my husband hates the idea and therefore we never keep any money at home. I think if you can keep it in a fire resistent safe it should be fine – of course it would be a small amount.

  5. says

    I don’t think it can be ignored that most people should still keep some of their emergency fund in cash. At the end of the day, cash will always be reliable and ready to use.

  6. says

    Good article, having an emergency fund is vital. In fact I look at it as insuring one’s sustainability if an unexpected event like a job loss occurs.

  7. says

    I would keep a little at home in a fireproof box, but most can be kept at your bank where you can get to it at an ATM if needed.

  8. says

    I keep money in a rewards checking account earning 4% interest, FDIC insured. I can write a check or get the money with an electronic transfer. For real emergencies I have a little cash that is not in a bank account.

    Rewards checking is where you make a minimum of 10 purchases a month with a bank card and in return you get higher interest because the bank earns money off the merchant fees. I have been doing it for years and have compiled a list of the highest interest accounts ( http://www.rickety.us/rewards-checking/bank-rewards-checking/ ). There are a few nationally available accounts.

  9. says

    An emergency fund is an easily accessible stash of money you can tap if you lose your job, get sick, or run into immediate, unexpected expenses — like a blown gasket — so you don’t blow a gasket. Maintaining a cash cushion will help you ride out rough times without piling up debt and will protect your long-term financial health.

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