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October 2022
AuthorJeff Venables is a Christ-follower, husband, father, high school chemistry teacher, Dave Ramsey certified financial coach, runner, and blogger. |
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Who Needs An Emergency Fund?4/1/2021 Everyone.
This could be the shortest post ever. But let me explain a little further. There is an excellent chance that you will have an emergency that will require money to cover. If you don't have an emergency fund, then chances are that your emergency will cause economic distress. You will either have to go into debt or draw from your savings or investments that are designated for other purposes. The sole purpose of the emergency fund is to protect ourselves from either of those potential situations. What qualifies as an emergency? There are the usual things - car problems, leaking roof or other house situation, an illness or injury to yourself or a family member, just to name a few. Or, suppose there is a pandemic and your job is eliminated, either temporarily or permanently. Depending on your field, the possibility of downsizing, layoffs, or furloughs always exists. We need an emergency fund to cover the shortfall if any of these things should happen. How much should be in the emergency fund? We recommend 3-6 months of expenses. Does that mean 3-6 months of income? Hopefully not - if you experience an emergency, you will likely change your lifestyle (temporarily), and trim the budget significantly. You should not be spending your entire income, anyway. So, depending on your situation, decide how much it would take to survive 3-6 months on a shoestring budget in the case of an emergency. Should the emergency fund be invested? NO - this money should be liquid. It should be in a savings account or money market account. The last thing anyone needs is an emergency in a down market that would require us to take a loss by selling shares of a stock or mutual fund at the wrong time. Keep this money is a low-risk (and therefore low-return) account that is readily and quickly available. The purpose of this money is not wealth-building. It is to protect the other money (in mutual funds) so that you won't have to touch it in the event of an emergency. Some people even like to open an account at a different bank than their "regular" checking and savings account, so that they won't be tempted to access the funds during a non-emergency. When you have an emergency fund, an emergency is just a temporary situation that you can weather. Without the emergency fund, that emergency becomes a financial crisis on top of the emergency. Let's avoid that and fully fund that emergency fund today! Do you need help with this and/or other financial issues? Schedule a consultation and see if a financial coach is the answer!
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