Most of us can agree that we should have an emergency fund. Some call it the rainy day fund or the “OH NOOOO!” fund, but we all have a basic understanding that each new day brings with it the possibility of sudden financial burden.
The purpose of an emergency fund is to cover unexpected expenses without going into debt. This means that your ability to borrow against your credit limit is NOT part of your emergency fund. Consumer debts like credit cards are an emergency in and of themselves.
The goal of this post is to help you turn your emergency fund into merely an “inconvenience” fund.
Let’s first separate the expected from the unexpected. We certainly don’t want to use our emergency fund for expenses that don’t fit the description of an emergency.
As listed above, properly maintaining property should be cash flowed slowly over time, vs. waiting until the damage develops into an actual emergency (speaking from experience!). This is also a reminder to review the perils (causes of loss) covered by your property insurance policies. Water damage from floods is an example of a peril that requires a separate insurance policy.
Add the total to determine your personal emergency fund goal.
Now that you have calculated your emergency fund need, it’s time to put that cash in an appropriate investment vehicle. The ability to pay for emergency expenses quickly requires this fund to be a liquid asset – meaning that it can be quickly converted into cash while keeping its market value.
Get in the habit of thinking about your money in terms of time – how quickly would you need the money. The time horizon for an emergency fund can be as little as one day and as much as six months. It is wise to keep a portion of your emergency fund on hand (in cash), another portion in a high-yield savings or money market account with same-day accessibility, and the last portion in low-volatility short-term bond funds or CDs. Always remember that your emergency fund is NOT a long-term investment vehicle.
A healthy emergency fund is not saved overnight, but as you approach your goal, you will feel a great sense of relief. This risk management concept provides peace of mind – which is priceless.
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