Emergency fund tipsBy Randell Tiongson on September 18th, 2013
An emergency fund is a complete must for everybody. I’ve written a few articles on emergency funds already and it is a whole chapter in my book, No Nonsense Personal Finance: A Step by Step Guide. 3 to 6 months worth of expenses is a good size for the emergency fund.
For those who already have their emergency funds or on the way to completing it, congratulations! You are on your way to achieving real financial peace. Now that you have one or already building it, here are some tips for you:
1) Don’t invest your emergency funds. Yes, you read it right! Keep your emergency fund in cash or near cash placements like savings, current or time deposits. Do not invest your emergency funds as these are intended to be a buffer or a margin for your finances. Make sure that the deposits can be withdrawn quickly and without huge penalties. Investing in volatile instruments like mutual funds or Unit Investment Trust Funds, even the less volatile ones like Bond Funds, may not be wise as these are normally sensitive to market changes, and you might experience some losses if you keep your money in the short term.
2) Keep some of those emergency funds in cash; maybe one to two weeks’ worth as you may have difficulty in accessing your bank in sudden emergencies. During calamities, ATM machines may not be working so you’d want to have access to some cash. Just a reminder that cash allocated for emergency will not be touched unless it’s really an emergency, otherwise you will deplete those funds faster than you should. Keep a portion of your emergency fund in an ATM account, say two weeks’ to one month’s worth. Emergencies do not necessarily occur during banking hours and you may need more cash.
3) While I don’t recommend you invest your emergency funds, it might be a good idea to put them in some placements that will give you better yields than savings accounts. Time Deposits or Money Market Accounts are ideal instruments for you to park your emergency funds while still realize some earnings.
4) Keep your emergency funds to a maximum of six months’ worth of expenses only, in excess of which you should invest—a topic for a later chapter.
5) If you are comfortable with managing multiple accounts, a separate savings account for your emergency funds is a good idea and one I recommend.
“A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences.” – Proverbs 27:12, NLT