The Importance of an Emergency Fund

Marshall Rathmell |

Oh no! You’ve just lost your job! You do not have another source of income and have bills that need to be paid soon, what are you going to do? You wish you would have been contributing money to an emergency fund but didn’t think it was necessary or something like this would happen to you. Unfortunately, anything can happen. One cannot predict when a major event occurs that will lead you to needing money right away. Losing your job, medical emergencies, losing a loved one, or even a bad car accident can take place any day and it is always best to stay prepared. A great back up plan is an emergency fund, and here’s what you can do to create and maintain one.

A good first step is to put away some money each time you receive a paycheck or a bonus/raise. For example, if you earn about $3,000/month, you can take about $1,000 of that and put it into a savings account. Over time, maybe a year later, you have added to it and now it is $12,000. Not bad, but you want to avoid the opportunity cost and invest that money in something paying a good rate of interest while taking little to no risk. An account in which you can utilize is a money market account. This financial option is highly liquid, should not drop in value, and currently has interest rates paying around 4-5%. Keeping your cash liquid is key because it is easy to retrieve when needed. Moreover, it benefits from FDIC insurance, ensuring that in the event of the bank’s foreclosure, it will be protected by the government’s division of the Federal Deposit Insurance Corporation.

Another option is the traditional route, a savings account. If you want to play it safe and not take on much risk, this type of account is more suitable for you. It is like a money market account, in the sense where they are liquid, FDIC insured, and earn interest. The difference between these two is that a savings account avoids minimum deposits and balance requirements – you can contribute as much or as little as you’d like. This is helpful for starters that want to dip their toes in the water and then eventually increase their contributions. One downside of this account is that lower risk equals lower return. Interest rates with traditional savings accounts tend to be much lower at commercial banks, and if you are looking for a greater return, you should consider a money market account.

All in all, it never hurts to have a “Plan B” option and open an emergency fund. You will thank yourself when you are in need and have money set aside for that very purpose. It will also give you a sense of financial security which avoids stress and sleepless nights. Once an emergency fund is attained, you will find yourself with the confidence to take on anything life unexpectedly throws at you!