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Your Emergency Fund
What would you do if you have an unforeseen critical expense? How would you manage? Thats where an emergency stash of cash or an emergency fund comes in.
An emergency fund is a cash account that is used only in the event of an emergency, to fill critical financial gaps, or to meet unexpected expenses. It is immediate access to cash that allows you to take care of unforeseen circumstances without impacting the money you have committed to your savings and investment accounts.
The account where your emergency fund is maintained should be one that offers the best annual percentage yield (APY) possible and minimal fees. Take the time to do your research for the best option, keeping in mind that the most important factor is that the account should be easily accessible. And plan to look beyond the bank where you currently do business.
Check out banking competitors and consider a credit union if you are not already a member. These financial institutions are cooperatives where individuals pool their money to provide loans and services to fellow members. They often require some type of affiliation (e.g. school, company, church, etc.) to qualify for membership. Typically, they provide many of the same services at banks, often at a reduced cost.
Check out the Credit Union Association website to find potential credit unions near you.
With regards to the question of how much should be maintained in an emergency fund, there are various schools of thought. While some suggest one year’s living expenses, others often suggest three, six, or nine months of income.
In most cases, your marital status (theoretically single people should have more as they are reliant on one income); the number of children in the household, and the level of job security are factors for determining how much to maintain. Other key factors may include the age of your appliances, the age of your primary vehicle, as well as the age of other items in your household that might need repair or replacement. The older the items, the more prone they are to need replacement or repair relative to newer items, and therefore, the more you should consider for your emergency fund.
Ultimately, the amount will vary for everyone as the factors that impact their lives will be entirely different. However, you should not consider anything less than three months living expenses for your emergency fund.
Mr. James C. Molet holds a MBA from Wayland Baptist University. He blogs on financial topics at retirement savvy.net and is the author of RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit. Mr. Molet retired from the U.S. Army after 21 years in 2005.