Saving for the Unexpected
What if your car transmission goes out, your home computer crashes or your washing machine is on its last leg? These unexpected scenarios require immediate cash. Roofs leak and people get laid off–it always seems that something expensive is sure to happen when you least expect it. That’s why you need to be prepared by building an emergency cash reserve. Saving for the unexpected protects and prepares you for life’s expensive surprises.
How Much is Enough?
Anywhere between two to six months of expense money should be sufficient to create an adequate cushion for emergencies. But everyone has a different financial comfort level and the amount you should keep in reserves depends on two things: your monthly expenses and the stability of your income.
- Monthly expenses. How much do you and your family need to function comfortably each month? This figure should include not only your fixed expenses–such as your mortgage and car payments–but also your variable expenses–such as phone, utilities, food, etc. Once you’ve determined your monthly spending, you need to decide how many months of expenses you need to set aside in your reserve.
- Job stability. People with secure jobs, or families with double incomes, may not need to put more than two-three times their monthly expenses into an emergency fund. However, if you are single with inconsistent income or work in an extremely specialized field, you may want to save more than six months of expenses. The point is to put enough away to get you through rough times.
Where Do You Put It?
It’s smart to choose safe, short-term, and liquid investments for your emergency fund. Checking, savings and money market accounts are good options. However, some investments–such as U.S. Treasury bills or CDs–may provide higher returns. You can wait until their maturity dates to pay off unexpected bills or you can cash them in before they mature, though you may lose some interest and be charged a penalty.
Once you decide the best vehicle for your reserve, leave it alone! You should never use the funds unless you have an emergency. The goal is to keep your reserve fully-funded at all times so when the unexpected happens, you are fully prepared with enough money to get you through it.