A financial safety net can help protect you in emergencies
In times of crisis, you want to have quick access to funds to help you bridge the gap. Make sure you’re prepared by setting up an emergency fund – now – that can cover urgent financial needs.
How much you should save
Most advisors suggest you have three to six months of living expenses in an emergency fund. But Jim Heeney, Infinitas advisor, said the actual amount should be based on your individual situation.
“Do you have a mortgage? A car payment? High health care costs? These are all factors to consider when calculating how much to have in an emergency fund,” Heeney said. “Don’t overlook job security, income level and your overall health. Major changes to these factors can also have a devastating impact on your finances if you’re unprepared.”
How to build a financial safety net
Wondering how to start your emergency fund or how to boost your current reserves? Heeney gives a few ways to eliminate the shortfall:
Start saving. Set something aside every month. If possible, allocate part of your pay check to a special savings account. “Budget emergency savings as part of regular household expenses,” he said.
Reduce discretionary spending. Put some of the money you would spend eating out, going to the movies or other social activities, toward your emergency fund.
Use investment earnings. Gains from stocks, bonds, mutual funds or even CDs can be directed to savings.
Borrow – as a back-up. Credit cards, a line of credit or a cash value insurance policy are a few ways you can borrow to get through a crisis. But Heeney offers a word of financial caution, “Borrowed money has to be paid back – often at high interest rates – so think of borrowing as a back-up and not the foundation for building your cash reserves.”
Where to stash your emergency cash
Easy access is critical for an emergency fund. An FDIC-insured, low-interest savings account is one option. But Heeney said you may also consider a money market deposit account* or a short-term CD. These typically offer higher interest rates than a savings account and there’s little increased risk.
A CD is a fixed-term investment that pledges a return on the principal plus interest, on a stated maturity date. Heeney said it’s important to remember that some fixed-term investment options, like CDs, have penalties for early withdrawals.
“If your cash reserve has fixed-term investments, be sure to stagger the maturity dates across a short period of time. This will ensure you can access the money without penalty for sudden financial needs.”
Once your emergency fund is established, Heeney said you should revisit the reserve account periodically to make sure it reflects any life changes.
“Personal and financial circumstances change often – a new child is born, an aging parent becomes more dependent or a larger home brings higher expenses,” he said. “Your cash reserve is the first line of protection in a financial emergency. Review your account from time-to-time to make sure it still meets your current financial needs.”
Want more information about how to make sure you’re prepared for an urgent financial need? Let’s talk: [email protected].
*A money market deposit account is different than a money market mutual fund. A money market deposit account is insured by the FDIC, whereas an investment in a money market mutual fund is not FDIC insured.