Any good financial planner will generally tell you to set aside at least three to six months' living expenses for a rainy day.
An emergency fund helps you pay bills such as your mortgage, utilities and groceries in the event you lose your job or become disabled, or to pay for an unexpected car or home repair, to name a few examples.
If you've put off this financial necessity, you're not alone. More than one in four Americans save no money for emergencies, according to a recent Bankrate survey. About one in five people sock away enough to cover less than three months of expenses.
Yet more than a third (34%) of respondents reported a recent unexpected event such as a medical problem or a home-related expense that stung financially, according to Pew Research national survey.
The ideal size of your fund depends on such factors as the number of incomes in your household, your earnings from such other sources as pensions or investments, your access to a home equity line of credit and your overall cost of living. Many people also underestimate expenses or only consider fixed expenses such as a mortgage or car payments. Examine your whole budget.
With savings accounts paying very little interest, if any at all, one big question becomes where to invest your emergency fund. Your fund needs to be liquid; you need easy access to the money without having to wait days, weeks or months.
One suggestion would be for you to place your emergency fund in a savings account. You may also place the funds in a money market account at a bank, discount brokerage house, or other financial institution. These accounts are liquid and stable, usually invested in bonds and other low-yielding paper.
Don't expect a high rate of return for these types of accounts; the point is to not expose these funds to needless risk. For example, putting your emergency fund in an aggressive stock mutual fund, which I don't recommend, may get you better returns, but your safety net can be significantly diminished, or you can loose it all together, in the event of a market crash or correction. This would leave you with a fraction of the money you originally used to fund the account.
That's bad news indeed in a financial emergency.
Feel free to contact us at RDS Financial Services should you have any questions.