Having money set aside for an emergency is something every family should do. Here’s how to figure out how much to set aside and where to put it.
1.) You will hear financial planners debate over exactly how much you should set aside. Some will say three full months of expenses, others will say six. Six is probably a better number simply because you have more protection in case of a job loss, injury, pregnancy, etc. You should figure out how much your bills total each month (mortgage, rent, utilities, gas, insurance, loans, food, etc.) and multiply it by six. You may even want to throw in a few extra dollars a month for anything unexpected that you might have to buy.
2.) Why not put in enough for a full year, or two years? Well, you could, but emergency fund money is usually put into a bank or low-interest-yielding account. You should be putting most of your saved money into a mutual fund or some other type of investment that will get you a higher return. The sole purpose of an emergency fund account is to be able to get the cash immediately.
3.) So where should you put the cash? A money market account or savings account at your local bank is probably the best place. The main concern is that you want to be able to get the money immediately if you need it. A mutual fund is alright, but you need to make sure the money can be wired to your bank immediately upon your request. Often times, that will not happen…it usually takes two to three days. And no, do not put the money somewhere in your house. A fire or robbery could be the reason you need that cash. Put it somewhere safe.
4.) Review your emergency fund every year. Has your income decreased? Have your expenses increased? Make sure that you are up-to-date on how much you have in expenses each month.
Emergency funds are often unnecessary, but like insurance, they are there if you need them. They will give you and your family peace of mind in case an emergency arises.