Personal financial management begins with some basic strategies, and ideas. Besides budgeting and debt management, starting to an emergency cash fund, is the first place to start when saving money. The temptation is to run into the stock market, maybe take some risk, or invest in our company’s retirement plan, but the emergency fund is arguably the most important piece of getting your finances in order. Investopedia summarizes an emergency fund as:
An account that is used to set aside funds needed in the event of a personal financial dilemma, such as financial surprises, unplanned expenses, illness, loss of a job, anticipated repairs, etc.
When we have some money put away for the “rainy day,” or to handle unexpected financial curveballs, it provides a safety net, and financial peace of mind. The money is readily available, very liquid, and safe to be used in the case of emergency, i.e. an emergency fund. How much we put away is really dependent on personal preference, what we can afford, and would be sufficient to cover our expenses for a period of time. A rule of thumb would be that we should have 3 months, with 6 months even being more ideal. Obviously, if we have unpredictable income, such as commissions, seasonal income, or concerns about our employment, a lay-off, or possible job change, then we may to decide to set aside more. Also, if we are having health concerns, or have potential needs with other loved ones, or issues then we need to consider that as well. There are no set rules, but the goal is trying to make the unpredictable expenses, more predictable, and feeling secure.
Ideally, this money should be in a very safe, easily accessible place, such as a savings account, money market, or maybe even 3-month T-Bills. Two things to keep in mind, is that most mutual fund companies have a money market option available. Also, beware of any service fees that may be charged if we don’t maintain a proper account balance. Unfortunately, there are many examples where we got into a financial bind, and took a loan from our retirement 401(k) to bail us out. This isn’t what the retirement monies are to be used for, because they can come with potential fees and penalties, or even income tax consequences.
A couple of examples may help further:
If our monthly budget totals roughly $ 2,100, then we should shoot for having about $ 6,300 in an emergency fund. Also, in this same example, let’s say that we have a leaky roof that needs about $ 1700 to fix, then our emergency fund should be $ 8,000 ($6,300 + $ 1,700).
As with any savings goal, getting started and sticking with it, is the best plan for success. Getting started with our emergency fund gives us flexibility, and financial peace-of-mind.