Almost half of all Americans do not have enough emergency savings stashed away.
Bankrate.com reports many people lack enough emergency savings to cover six months or even three months’ worth of expenses. Having enough money saved to cover expenses when additional monies are needed is key to avoiding high cost credit card debt and keeping you financially stable.
Why You Need an Emergency Fund
Life happens unexpectedly sometimes. From hurricanes and car breakdowns to job loss and other unforeseen circumstances, all of us from time to time are affected by the unpredictable in life. This is why it is important to put some money aside for emergencies.
3 reasons Americans find themselves needing an emergency fund:
1) Loss of a Job: There is no guarantee that the paycheck you are earning today will continue to feed your bank account forevermore. The fluidity of the job market and business economy means everyone should be prepared for potential job loss.
2) Medical Expense: Whether it is a run to the emergency room or a serious diagnosis, you will be responsible for co-payments or deductibles, among other expenses.
3) Home or Car Repair: No one can be sure when a necessary repair will call for you to have extra cash on hand. From an air conditioning and heating issues to water pipes and tires, these items will need to be repaired before more damage or additional losses result.
How Much to Stock Away for an Emergency
It is commonly recommended that Americans be prepared with enough savings to cover six months’ worth of expenses. Think about keeping an emergency fund that can help you pay your expenses without too much hardship for a minimum of 183 days, if not longer.
When trying to figure out the actual money number, consider your mortgage or rent, food, phone, utilities, car payment, and other monthly expenses that you don’t want to live without. You don’t want to find yourself putting your Coral Springs homes for sale on the real estate market out of necessity instead of choice.
How to Create an Emergency Fund
When creating an emergency fund, the monies need to be liquid so that they can be converted into cash quickly and with minimal impact to the price when needed. You don’t want to be penalized for withdrawing the cash.
Placing your money in an interest earning savings account works, but it may not earn you as much interest as you might be able to earn in other investment options. Remember, an emergency fund may never have to be accessed so you might want to include it as part of your investment portfolio.
Some options to consider:
- CDs: Longer-dated certificates of deposit, also known as CDs is a safe way to earn money safely. Penalties may apply if withdrawing early so be sure to shop around for the best early withdrawal terms from financial institutions. Constructing a laddered CD portfolio works well so that when the one CD matures, you can reinvest it if it is not needed at that time, and another one will be maturing later so you aren’t locked in to one long-term investment and yield.
- Bonds: Series I bonds are another safe way to save and earn money without risk. Typically there is a minimum holding period and a minimal purchase limit. If you have to cash it in, there will be a penalty but you’ve hopefully gained an inflation-indexed investment for your emergency fund.
