Do you have an emergency fund? In this post we’ll look at the importance of cash savings and creating an emergency fund. Learn why it is important to have an emergency fund and how much you should be saving into this.
An emergency fund is a pool of money that has been set aside to cover any unexpected future expenses. Sometimes called a contingency fund, it is important to build up this cash buffer in the event of any financial shock.
There are many unforeseen events that could arise which if not planned for could leave you financially insecure. This could happen through a loss of regular income or unexpected one off event. Examples of this include; job loss, medical expenses, or property maintenance.
Building up an emergency fund gives you the confidence that you are financially covered should the worst happen in future.
Your fund should consist of cash savings in an easy access account or other highly liquid assets. It needs to be quickly accessible so is no good being locked away in a long term fixed account.
Liquid assets can also encompass marketable assets such as shares and bonds. They are usually classified as a liquid asset if it can be easily converted into cash. Now it is good to have a mix of liquid assets but you should avoid holding all of your wealth in just one asset type.
For instance shares are liquid and can easily be sold for cash. If you held all of your wealth only in shares and needed cash to meet an urgent expense then you would have to sell at whatever the current market price is. If this were to happen under unfavourable market conditions such as a recession then you could end up cashing out at depressed valuations and losing money.
This is why it is important to keep back a portion of your assets into cash savings that can easily be accessed.
Although it needs to be accessible you really don’t want to just be storing cash under the bed where it could be lost or stolen. Depositing cash into a bank account gives security and allows you to earn interest.
Having an emergency fund in place will prevent the use of debt such as loans which could leave you worse off financially. More posts you might like; Different types of savings accounts explained.
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The amount you should save will vary from person to person as no one individual’s circumstances are exactly the same. Factors such as age, income, debts, family status and lifestyle will all play a determining role. For example, a single person on a modest income is unlikely to have as many outgoings as a family with young children.
It is prudent to have at least 3-6 month’s worth of expenses covered, and ideally up to 1 year. Always try to save more if you can, it will give you greater peace of mind. For example, if all of your monthly outgoings amount to $1000 then you should have a minimum of $3000 saved. This will at least give you a few month’s breathing space should the unexpected happen such as losing your job.
If you are retired then you should be aiming for a cash buffer to cover up to 3 years worth of expenses. Although you may receive income from a pension, this is unlikely to be as much as a regular wage from a job. Therefore a large expense would take longer to recover from. For example, if your monthly outgoings are $1000 then you would require $36,000 saved. It is important to plan your finances efficiently for retirement.
If you struggle to save enough money each month then start by putting away small amounts and gradually increase this over time. Look at ways to cut down your expenditure and divert some of this to savings instead. Read this post to see how you could be saving money by reviewing your finances.
Need help with budgeting and managing your finances? View this blog post; Effective Money Management With Free App.
As this cash may need to be accessed quickly it should be deposited into an easy access savings or money market account. Many banks offer savings accounts but the interest rates offered are usually very low on instant access type accounts.
Fortunately CIT Bank have products dedicated to helping people save for emergencies such as their money market account. This easy access account features one of the highest interest rates on the market at 0.45% APY, with interest compounded daily. With only $100 minimum opening balance, no monthly fees and 24/7 online access. It is the ideal account for households to build up their emergency fund. CIT are an award winning top 50 US bank that aims to empower people to power their business and savings. Make the smart choice with your savings, view the CIT Bank Money Market Account.
Remember it is always best to have easy access to enough cash to cover at least 3 month’s worth of expenses. This should be in a high yielding cash savings account or money market account. Having this in place will give you some level of protection and peace of mind should the unexpected happen. Common financial expenses that people often fail to plan for include loss of a job or medical expense.
Hopefully you will now know the importance of having an emergency fund and this will inspire you to start saving.
Once you have built up an emergency fund of easy access cash savings, any excess cash should be invested for future growth. For a comparison of saving and investing please read our blog post; Should I Save Or Invest?
It’s also important to save for retirement. A popular option is to make use of an IRA to take advantage of some of the tax benefits they offer. Self-directed IRAs allow you to invest in alternative assets for retirement. Learn more with this free self-directed IRA eBook guide.
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