Emergency reserve fund
TODO
- How to Invest Your Emergency Fund for Liquidity https://www.investopedia.com/ask/answers/13/safe-liquid-investment-for-emergencies.asp
Why do you need an Emergency Reserve Fund
When the going gets tough, the tough have cash.
Cash is king. Cash is security. Cash is protection. Cash is your “take this job and shove it” option.
Cash is just like the seat belt you buckle when you get behind the wheel of your car. When you go for a drive, you don’t plan to have an accident. Still, you wear your seat belt because (1) someone else could run into you, and (2) stuff happens.
It is the same with money. You may never plan on losing your job or becoming disabled or having your house burn down. But, stuff happens. It always has and it always will. Fortunately, that does not mean you have to be worried all the time. There is a way to protect yourself financially from the uncertainties of life. How? By surrouding yourself with a cushion of money.
How big should the emergency fund be?
Where Should I Keep My Emergency Fund?
While the cost of an emergency fund keeps getting higher, it’s an essential part of your financial plan. There are ways to maximize savings beyond stashing it in a regular savings account. Investopedia’s Silver suggests a a high-yield savings or money market account,
“Your emergency fund needs to be liquid and accessible immediately, but you should try to keep it in a higher interest earning type of account,” says Silver.
Earn interest on it
Not earning interest on your emergency fund is almost as bad as burying it in your backyard.
Where should you stash these savings? Try a shortterm bond fund.
Any family should attempt to begin by first establishing a separate savings fund of liquid cash or cash equivalents. For any family, having some liquid reserve of money set aside and readily available to be used in the event of emergencies, is something that almost always makes great sense, in any event. The point of having an emergency reserve fund in advance is to have a protective cushion in the event of sudden, unanticipated and unbudgeted expenses or needs - sudden or unanticipated loss of job, sudden car repairs, hospital and health emergency bills, home maintenance, college tuition, a vacation, a family wedding, a new car purchase, etc. Obviously, your existing family budget will be hard hit if such extraordinary expenses were suddenly to rise. If your income unexpectedly ceases, a reserve fund of some sort, if available, will come in handy for you just to meet your normal expenses until you can resume work again.
Money saving strategies for emergency fund
It needs to be liquid
The reserve fund should be set up in a form which lends itself to being drawn out in “liquid” (cash) form in the quickest possible way - a passbook savings account in a secure, federally insured, local bank or other similarly sound financial institutions, for example, or an account with a so-called “no-load” money market mutual fund which invests in special financial instruments like short-term government and corporate notes or certificates of deposit and bankers acceptances, as such funds can be withdrawn in the same way that a customer can with a checking account by simply writing a check and cashing it.
The mortgage fund is an extremely illiquid investment. You can’t convert the mortgage payment to cash or get your money back easily once you invest it in the mortgage payment since it is not readily available for immediate use once invested.
A passbook savings account or mutual fund are considered a highly liquid type of asset or investment that can be readily cashed in for dollars virtually on demand.
Money market accounts that pays reasonable interest: This is one of the simplest and most secure alternatives around for anyone who wants to put aside some cash and earn a reasonable return on it. When you make a deposit in a money market account, you are actually buying shares in a money market fund - a mutual fund that invests in the safest and most liquid securities there are: very short-term government bonds and sometimes highly rated corporate bonds. Just a few years ago, you generally needed a minimum of as much as $10K to open a money market account. Because of this, many people still mistakenly think these accounts are for the rich. In fact, you can now open most money market accounts with a minimum deposit of between $1K and $2K - and in a few selected cases with as little as one dollar.gg
Build your emergency reserve fund and investments simultaneously
An ideal way to be able to establish a reserve fund is to start out by setting aside a reasonable amount of money in your budget. To make it painless and assured as possible, the amount you set aside must be a figure that is reasonably affordable so as to assure that you can make the deposits continuously over a long term without fail. Each month or paycheck, you first “pay yourself” - that is, you set aside a designated amount and put it into a savings or mutual funds account, and budget your other expenses with what is left over. To be effective, the set aside and savings program must be done under conditions of strict and absolute discipline; once begun, you must stick with it, you must do it on a regular and continuous basis, making the set aside automatically each and every month or paycheck, and you must doggedly resist every temptation to withdraw from the fund - except in a real absolute emergency.
Treat the reserve fund as just one vital component in an overall “diversified” investment plan where the reserve fund is coordinated with other vital components, such as mutual funds, shares of stock, savings bonds, etc. The point is that establishing an emergency reserve fund and starting investing at the earliest possible time, do not necessarily conflict with each other, nor are they mutually exclusive; you need not necessarily have to select one over the other. Rather, you can have both, more or less, at the same time.
How? By taking a balanced approach to the plan. For example, you can begin investing, an acceleration of your mortgage at the same time that you establish an emergency reserve, but undertake the investment or acceleration only modestly, until you can accumulate an adequate reserve. e.g. put 75% of your available savings into emergency reserve and only 25% into acceleration or investment. You build up your fund gradually over months or years, and after some time, when your reserve is adequately established, 100% of that extra money can now be put into the acceleration plan or investments.
Both programs can be reasonably coordinated in this manner. Start by putting most percentage of the extra money into the emergency reserve fund allotment at the beginning. With each year/month, a small percentage can go into investments or acceleration plan. When the target for the emergency reserve fund is reached, 100% of the extra money can go into investments or acceleration plan.