The idealized world where sudden expenses don’t lead to financial ruin exists, and it’s called the emergency fund. Having an emergency fund is prudently preparing for unexpected events and the loss of income. Financial confidence starts with a straightforward commitment to saving for life’s unanticipated but inevitable challenges.
The Emergency Fund
A starter emergency fund has at least $1,000 set aside for unexpected expenses. This safety net can help cushion or fully cover expenses such as a sudden home repair, a car breakdown, or a trip to urgent care. Other examples include burglary, emergency travel to see family, and emergency vet care.
Once $1,000 has been built as quickly as possible, building toward an emergency fund that covers 3-6 months’ worth of necessary expenses is best. In the case of job loss, this ensures the peace of mind that you and your family can maintain your current standard of living during your job search. Since the emergency fund only includes expenses, it should not include savings, investments, or costly entertainment.
Ideally, the emergency fund should not be stored in an easily accessible checking account with a debit card. While the funds would be readily available, if it’s too tempting to spend on non-emergencies, it might be better in a high-yield savings account. The opposite is also true – money stored in a CD at the bank cannot be accessed in an emergency without paying a penalty, which also counteracts its investment returns.
While storing thousands of dollars and not using it sounds expensive, relying on debt and high-interest loans is unaffordable. This adds financial stress to any emergency, can negatively affect your credit score, and could mean paying off the emergency long after it has passed.
As well, making lifestyle changes should also affect your emergency fund. Buying a new home or car and new hobbies in the family mean setting more money aside. Therefore, revisiting your expenses and recalculating your emergency fund annually is a prudent practice.
Building Peace of Mind
Life’s unexpected but inescapable twists can be as surprising as driving over a screw. Take the first step toward financial security with Tulsa financial advisors. For a free consultation, contact us today at (918) 492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.