It may be tempting to use your fund for incidental or frivolous purposes, so make sure you don’t deplete this resource for any purpose other than an actual emergency.
Starting early is the key to setting up an emergency fund, because it helps you build up a comfortable cushion against https://rapidloan.net/payday-loans-nh/ unexpected emergencies later in life. Here are two simple ways to begin saving for one.
You probably want to park your emergency fund in a vehicle that can be easily liquidated should a financial need suddenly arise. While storing cash in a savings account may be the safest approach, there are other relatively secure ways to store a part of your emergency fund that offer greater interest-earning potential. These include high-interest savings accounts, money market accounts, and no-penalty certificates of deposit (CDs), which don’t charge savers a fee if they need to pull their money out before the maturity date. You’ll have the access you need in an emergency but won’t be incurring fees and time delays associated with other vehicles, such as brokerage accounts.
You may want to build an emergency fund before venturing into volatile investment vehicles such as stocks. Whereas the latter offer greater long-term growth potential than cash and cash equivalents, their value can suddenly decrease in the event of an economic downturn, as the 2020 economic crisis and lockdown made vividly clear. Should that be the moment you need to tap them, you could lose more value. An emergency fund protects your portfolio against that risk.
A number of major employers have introduced programs encouraging emergency savings because of the effects of financial instability on productivity and retirement security. Here’s a sampling of programs from three major companies.
Here’s a hypothetical example showing how to assemble an emergency fund. Let’s say a married couple has monthly expenses totaling $5,000. This includes the couple’s mortgage payments, food bills, car payments, and other necessary outlays. Using the three-month rule, the couple needs to set aside at least $15,000 (or $30,000 for six months and $40,000 for eight months) to address any unexpected financial burdens.
If you’re living paycheck to paycheck, you may want to start with more modest goals, such as putting 2% of your net income into a rainy day fund and slowly increasing your contribution rate every few months. Even a modest safety net can help buy you a little time should you face an unforeseen financial crisis.