To the rescue: An emergency fund can help plug the gap
CHICAGOIf you learned suddenly that your home needed a new roof, could you access the cash to pay for it before your possessions were drenched? What if you lost your job? Would you be able to cover your monthly bills? You could with an emergency fund, says the Illinois CPA Society. If you dont already have one, now is a great time to establish a plan for 2003.
Everyone should have some easily accessible short-term savings stashed away. Having an emergency fund means that when the unexpected happenswhether its a job loss or an unanticipated home repairyoull have the resources to meet your day-to-day living expenses. Without an emergency fund, you may have to resort to credit cards and could find yourself paying off debt at double-digit interest rates for months or years to come. Or you may be forced to sell assets, such as stocks, when the market is down, resulting in a loss.
How big of an emergency fund do I need?
While CPAs generally recommend that you set aside enough money in your emergency fund to cover three to six months of living expenses, your individual circumstances may dictate that you have more or less. Keep in mind that this recommendation doesnt equate to three to six months of your current salary. You just need to set aside enough to cover your basic monthly expenses.
First, youll need to determine the cost of your necessities, such as your rent or mortgage, utilities, debt repayment, groceries and life, health and auto insurance premiums. Multiply your total expenses by the number of months you want your emergency fund to cover.
Building an emergency fund requires discipline. You may have to reduce spending to free up extra cash. The best advice is to treat your savings as you would a bill. If you determine you need $12,000, set an affordable amount you can put away each month, without fail, until you reach your goal.
Where do I stash the cash
in my emergency fund?
There are two basic requirements: (1) your money should be in a safe investment; and (2) you should be able to access it quickly. CPAs generally suggest you use a savings account at a bank or credit union or a money market account. Money market accounts come in two typesbank accounts and mutual funds. Both have relatively low yields, but high liquidity, and both typically pay more interest or dividends than savings accounts because they are considered less transaction-oriented. Its important to know that money market mutual funds are not insured, but since they invest in highly liquid, safe securities, they are considered relatively risk-free by most planners.
You may have to meet a minimum balance requirement to open your money market account or mutual fund, and you may be limited to only a few free checks each month. If you decide to go this route, look for a money market account or fund with a high interest or dividend rate, low fees, and check writing features. Some even provide an ATM card, which may or may not be good, depending on how disciplined you are. Remember, your emergency fund should exist for things like unemployment, medical bills, or a new furnacenot a weekend at the beach.
Whats in it for you?
Saving money on your own is seldom as much fun as spending it, but, like most other things, it becomes easier over time. The peace of mind that comes from knowing you have the financial resources to carry you through rough times can be worth the sacrifices you make now. And, remember, should you have to tap the money in your fund for an emergency, repay it as soon as you can.