Business | Investment
Five tips to create emergency funds
It's not difficult to save for a rainy day if you are practical and consistent in your approach.
- By Joe Light, Bloomberg
- Published: 00:01 August 9, 2008
Lindsay and Patrick Heineke seem to be doing everything right, financially speaking. The Whitinsville, Massachusetts, couple are aggressively paying down mortgage debt and are saving for retirement at a pace that would put most of their twentysomething peers to shame.
There's just one thing Lindsay, 26, and Patrick, 27, are missing: a sufficient emergency fund. They can protect themselves by taking these steps.
Chart your expenses
To figure out how much you need to save, you first need to calculate how much you spend every month. As tedious as it may seem, it pays off to go over the past three months of bills to get a monthly average of your expenses.
Measure your need
The rule of thumb is that you should have three to six months of living expenses in the bank. But your personal target depends on how stable your income is, says Tim Maurer, a Baltimore financial planner. With two salaries - which Lindsay and Patrick have - a three-month emergency fund may be sufficient in good times.
When finding a new job is tough, as it is now, it's a good idea to push that up to six months. If your family depends on a single income or if one or both of you rely heavily on commissions or bonuses, shoot for a six-month fund in safe times. And daunting as it sounds, aim for a year in uncertain times.
You can reduce the fund if you are guaranteed a severance package, but never dip below three months of cash - a lost job isn't the only potential emergency. Also, keep in mind that your fund may not be just for you. If your parents or grown-up children are likely to call on you in a crisis, you might need to tap your savings to support their emergency.
Find a place to put it
Often, the safest accounts offer interest rates that don't even keep up with inflation. "But the emergency fund isn't about yield," says David Greene, a financial planner in Fairfax, Virginia. Above all, you need an account that won't tumble in value and that's as liquid as cash.
Taxable stock and mutual fund accounts, while relatively easy to get at, fail the first test. When the economy is in trouble, chances are stocks are as well, making it the worst time to cash out.
The past six months in the US have shown that home equity fails the second test. For the best combination of access, safety and yield, you have three options (in the US): a bank money-market account, a high-yield savings account and a money-market mutual fund.
Build it up
Starting from scratch? Save fast. You don't want to be one emergency away from debt. Halt retirement savings and extra payments on low-interest loans until you have the target amount in the bank, says Maurer. Then resume retirement contributions.
Look but don't touch
Once you've got the fund built, revisit it once a year and consider upping the amount if life events - like a new baby, new house or new salary - have increased your spending. Resist the temptation to use the fund for anything other than necessary expenses.
Share this article
Popular in Business
-
XPRESS
Way to go this DSF
A fun-filled route to guide you to all the happening dos in town
Business Editor's choice
-
Shaikh Mohammad reaffirms UAE unity
Vice-President quashes talk of discord and reassures investors on the strength of Dubai's economy
-
Pizzazz on the palm: A Nikki Bisiker project
Bright, bold and ultra glam are the top notes of this apartment in The Palm Jumeirah's beautiful marina
-
flydubai starts service to Sudanese capital
Dubai's first low cost airline, celebrated its eighth inaugural flight in less than six months
