An emergency fund acts as a safety net, protecting you and your family from unforeseen circumstances where you need cash immediately. Life can be full of unexpected obstacles; having cash at hand will help you by providing you with more options and preventing you from taking on debt at the worst time possible. The most common needs for emergency funds are job loss, unexpected medical expenses, extensive but necessary house repairs, death in the family, and auto repairs/replacement. Oftentimes, when it rains, it pours with unexpected issues occurring simultaneously.
You can prepare for financial emergencies which will require access to cash by keeping an appropriate emergency fund. The assets should be liquid so that you could access the money quickly in the event of an emergency. As such, these assets should be in cash, CDs, money markets, and/or short-term fixed income instruments. The money should be easy to get via check, teller window, or ATM machine and incur limited or no penalty for withdrawal.
While the determination of the amount of an emergency fund is dependent upon a number of factors specific to the family or individual (e.g., job security, whether both spouses are employed, the ability to find a new job in one’s field, etc.), in general your emergency fund should cover six to nine months of your typical monthly expenses that are considered necessities:
- mortgage and/or rent
- insurance (house, car, and health) premiums
- transportation costs
If you are retired and dependent on regular withdrawals from your investment portfolio, your emergency fund should cover two to three years of living expenses. While that may sound like a lot, it is because you want to avoid having to withdraw funds from a falling portfolio.
Lastly, here are just a few of the things to keep in mind with regards to financial emergency preparedness:
-Homeowners can benefit from having a home equity line of credit available for emergencies
-Stay away from turning to your credit card as a source for cash during hardship
-Keep some cash at home to cover a couple weeks of typical expenses in case ATMs/banks are closed due to natural disasters/financial crisis.