Author: Emily Tierney and Darrell R. Tierney
Keep an Emergency Fund = Keep Out of Debt
Who should have an emergency fund?
Everyone. Life happens and financial emergencies come up whether you are expecting them or not. Keeping an emergency fund or cash reserve helps keep these financial surprises from turning in to BIG financial surprises.
What is an emergency fund?
An emergency fund or cash reserve is to be used for financial needs that arise that were not budgeted for. Financial professionals typically recommend keeping three to six months’ worth of non-discretionary living expenses sitting in cash. This means keeping three to six times the amount that you spend on monthly essentials like rent/mortgage, utilities, food, etc. However, this is a general rule of thumb and some people may want to keep more or less of an emergency fund depending on their specific situation. This money is only to be used for financial emergencies, which holds a different definition for each individual. In general, your emergency fund money is to be used for financial needs that arise that you were unable to budget for.
Why should you have an emergency fund?
When you don’t have an emergency fund and a financial emergency arises, what do you do? Many people may turn to friends or relatives to borrow money, charge it to their credit card(s), use home equity, take out a loan, etc. to get them through their financial rough patch(es). The problem with turning to these solutions is that they all push you further in to debt – a place Windward likes to see people escape from. Additionally, one may have to pay interest on borrowed money in addition to going further in to debt. Having an emergency fund in place allows you to cash flow financial emergencies with your own money and keeps you from having to go in to debt (further).
Where should you keep your emergency fund?
You want to have somewhat easy access to this money in the case of a financial emergency. Keeping your cash reserve in a checking or savings account at a bank or a money market account are safe places as long as the amount is under the FDIC-insured limit. Some people may be hesitant to keep so much money in an account that earns little or no interest, but the truth is, the growth of this money is unimportant–it’s the safety net that the fund provides that matters.
When should you start?
Today! Calculate and/or select an amount that you would be comfortable keeping as an emergency fund. Then decide where you will keep your emergency fund and how you will access those funds in the case of a financial emergency. Once you know your goal, start saving until the fund is completely built up! Once your emergency fund is established, you can sleep a little easier knowing that any financial emergencies can be taken care of. Use your emergency mindfully and make it a priority to replenish it if you have to use the money.
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