Why do most — if not all — financial gurus encourage you to have an emergency fund?
It’s because so many personal emergencies happen. Right? Well, not entirely. Have you ever considered how an emergency fund can come in handy when you have to drop everything to reach out and help a family member in distress? I have.
Yes, it’s true, saving money can also help you get through an unforeseen turbulent time, ranging from a car breakdown to becoming unexpectedly sick, hospitalized, and needing to cover your insurance deductible.
Or a Girl Scout may upsell you 20 boxes of Thin Mints — an offer that you cannot refuse… Okay, so maybe, Thin Mints aren’t exactly an emergency.
Just as expenses can surprise you, your income can go awry. You could suddenly lose your job or side hustle income.
Bottom line: Expenses can come, income can go — sometimes simultaneously. This one-two punch could knock you out of the ring if you don’t have an emergency fund.
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You may still not be convinced. You’re invincible. I get it. I just turned 26, and I feel invincible, too. So since you and I are both superhuman, or super heroes — congratulations, by the way — we don’t need an emergency fund.
Hold on …
Even if this were true, what happens to others we care about is completely outside our control.
If anything, we should have an emergency fund for them — and ourselves.
Last year was tragic for my family. My grandpa died followed by my grandma 44 days later. My other grandpa was diagnosed with dementia, requiring him to go to a nursing home. Then my grandma had to have multiple heart surgeries. Then my uncle died. And my dad was diagnosed with cancer.
This is why it’s wise to have an emergency fund.
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When something happens, you can drop everything to be with those you love. Money shouldn’t be a concern at these times. You just go!
My emergency fund is as simple as it gets. I keep it in a checking account. It takes self-discipline because I see that balance constantly. It’s easy to spend a little here or there, but I resist.
Though if you doubt your self-control, put your money in a savings account where you don’t see the balance as often. I keep enough to cover three months of expenses. Most financial gurus suggest six to nine months. Choose a time range that makes you comfortable, but most importantly, is doable.
If you want a big emergency fund, I’d recommend putting it in laddered certificate of deposit (CD) accounts. This will get you a slightly better interest rate on the money. CDs usually have terms spaced out by three months.
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So, let’s say you want a 12-month emergency fund. Get four CDs. Each one will mature every three months, and you can decide whether you need the cash or if you should reinvest.
Personally, I find CDs inconvenient as an emergency fund. But here are a few other options: You could use your credit card(s) as an emergency fund. After all, if you’re able to rack up $5,000+ on a card, that may cover you for a few months. If it comes to either getting a payday loan or using a credit card, reach for the credit card.
You can also tap into your home equity if you have equity in a home. It’s not the best option, but it can work. If you have a Roth IRA, you can withdraw the principal without a penalty. You can pull funds from other retirement plans as well, but face possible penalties. You could also use other investment vehicles such as a money market account.
Another option is to sell off assets such as your Canon T6s, your MacBook Pro, or your flatscreen TV. Those will keep you afloat for a little longer — as will pocketing dividends from your investments instead of reinvesting them.
I prefer my simple method, though. It’s just a checking account plus self-discipline.
However you decide to do it, build an emergency fund. Don’t build it for yourself. Rather, build it for those you care about. When you have a family/friend emergency, you’ll be able to travel to reach them, get a hotel, eat in restaurants, and help them in other ways. Money will be the least of your worries.
Now I’m hungry for Thin Mints.