A Personal Financial Disaster is Brewing? Are You Ready? Do You Have an Emergency Fund?
According to the Board of Governors of the Federal Reserve System, approximately 54% of the American people have an emergency fund of at least 3 months. This leaves 46% of Americans without a secure financial plan in times of need.
So, what is an emergency fund?
- An emergency fund is a reserve of physical cash or liquid assets that can be accessed in times of desperate financial need. These holdings are often pulled from in situations such fixing car and home troubles or mitigating a temporary loss in income. For example, think of the movie, The Princess Bride. Wesley, Princess Buttercup’s poor lover surely saved up money 😉working as a poor farm boy in Florin. With these funds he saved up, he was able to go and save his true love who was destined to marry Prince Humperdinck. Life changes can happen out of the blue, and having money saved to save your princess, even if she comes in the form of an ’06 Honda Accord, can alleviate stressors from your life.
How can people begin contributing to an emergency fund?
- Building an emergency fund from scratch can be intimidating, but does not need to be. So start small, set a goal to save at least $1000. Finding cash to contribute to the fund can be acquired through methods such as simple budgeting and automatic withdrawal (bank account or auto-drafts of income), to name a few. When less money is spent through budgeting, the money saved can be put aside to contribute to the account for times of financial need. Implementing an initial goal of setting aside 3 months’ worth of funds and increasing to 6 months once that goal is met can make a daunting task seem more manageable while setting yourself up for larger emergencies.
Can I invest an emergency fund?
- Once an emergency fund has begun to be established, the money can be taken and invested into the stock market, or other liquid assets that can be easily accessed. If the fund is invested, it has potential to capture positive returns. On the other hand, if the fund is kept in cash there is not a possibility of monetary growth. It is recommended to speak with a financial professional on the best plan of action for each individual.
How much should I have in my emergency fund?
- The general rule of thumb for a well-established emergency fund is contributing the cash-equivalent of 3-6 months of living expenses. There is no set amount of cash that everyone should have. The amount that should be in an individual’s emergency fund is largely dependent on income and differs depending on lifestyle choices.
An established emergency fund is the best way to remain financially secure in times of deep financial trouble. When your world may seem to be collapsing around you, having a reserve of cash on hand can provide security and alleviate stress while also helping to preserve assets and expenses needed to maintain your lifestyle can be of great advantage.
Written by Intern Drew Schutt