An Emergency Fund: Your Safety Net
If you lost your major source of income today, how long could you finance all of your expenses before being forced into debt? If a great investment opportunity became available now, would you be able to finance it while avoiding debt?
Life’s exciting journey shifts between opportunities and challenges, whose timing is outside of our control, and which require immediate cash. Many persons, when faced with similar circumstances, choose to withdraw funds from an investment or retirement account. This is not the best option; an emergency fund provides a better solution. An emergency fund is money reserved for life’s unexpected opportunities and/or mishaps.
Why do you need an emergency fund?
An emergency fund provides you with several benefits. It serves as:
• The Opportunity Grabber
For example, in Shelly’s case where her friend was migrating and so put her car on sale. Shelly negotiated a great deal from her friend for the car, by agreeing to pay cash. This illustrates some advantages of an emergency fund:
1. Seize attractive opportunities in a timely manner; and
2. Protects you from having to sell your investments, especially in a down market.
• The Bridge over Troubled Waters
Peta-Gaye’s scenario also highlights the need for an emergency fund. Upon becoming unemployed for four (4) months Peta-Gaye was overwhelmed with expenses, and even on becoming employed she was left indebted and with little disposal income. With an emergency fund she would have benefitted from:
1. Sufficient funds to cover expenses in periods of no income;
2. Not needing an emergency loan; and
3. Maintaining financial independence.
How much will you need for your emergency fund?
The recommended standard for your emergency fund is the total dollar value of 3-6 months of ALL your mandatory expenses. However, it can vary based on:
1. Your age: If you are older and, therefore, closer to retirement, 1-2 years of expenses is recommended.
2. Security of employment: With a steady source of income from your job or business, your emergency fund should cover 3-6 months worth of expenses. However, if your income is unpredictable or seasonal, you should aim for at least two years worth of your expenses.
Getting Started with Your Emergency Fund
Now is the best time to start your emergency fund. Here are some steps to get you started:
1. speak with a financial institution, such as JMMB, to assist you in identifying your target amount, based on your individual circumstances;
2. start small, do not be deterred if you have limited disposal income;
3. be consistent with your savings; and
4. increase the amount you are saving in your emergency account, where possible, from bonuses and retroactive payments.
Be prepared for any eventualities or opportunities by contacting JMMB at 998-JMMB (5662), to start your emergency fund.