The thing about emergencies is that we do not see them coming. The first step to counter the unforeseen is to prepare financially for the possibility. Having the money required to pay the medical bills or get through the weeks or even months of being out of work is very critical. Having an emergency fund will help you meet your expenses without disrupting your investment plan.
An emergency fund is a cash saved up to maintain normalcy through the contingencies of life.
The amount to save in an emergency fund is usually agreed to be around three to six months’ worth of your living expenses. According to the US Bureau of Labor Statistics, the average unemployment duration was 32.7 weeks, or just under 8 months, as of October 2014. It is important to consider the individual’s specific field & level of expertise, and how long it might take to find a suitable job. Other sources of income also are to be considered, such as in the case of working couples. Here, if one paycheck stops, the family may be comfortable with fewer months’ worth of living expenses in savings than a one-paycheck family.
The best place for an emergency fund is in a liquid (easily accessible) account. A liquid account might be a regular saving account at a bank or credit union that provides some return on the deposit, and from which funds can still be withdrawn at any time without penalty. If your emergency fund is lodged in a separate account from your other savings and investments, you will not be tempted to dip into it for non-emergencies. A series of CDs or US Treasury Bills might also be a good choice when timed to mature at regular intervals. Retirement accounts are not a good location for an emergency fund. Withdrawals from these accounts in general are taxable and may be subject to the 10% early withdrawal penalty. Similarly, stocks are generally not a good choice for emergency funds owing to their volatility. If there is an emergency when the markets are down, you will be stuck selling at a loss.
Ideally, an emergency fund should be tapped only in times of true emergencies, such as job loss, major medical expenses, or other unexpected eventualities. Last, but not the least, ensure your emergency fund is built up if you have dipped into it.
If you have been putting off creating an emergency fund, it is time to get going. Consult with your financial advisors at GKM for more details on getting started with your emergency fund!