Do you have an emergency fund set up yet? If not, you need to start saving cash right away! Many people, simply choose, by default, to use a credit card “for life’s little emergencies”. This is debt perpetuation! A great place to begin is to get $1000.00 saved up for an emergency fund that will take care of things like broken windows or an alternator that goes out on your “getting older” car. This is just smart money. Having cash can save your debt reduction plan and credit card debt.
Of course, the very best amount to keep stashed for emergencies is 3-6 months of expenses. However, that’s probably not doable for most people. Especially if you’re just starting out, or starting over. Having a spare thousand bucks for those things that will happen is a great start.
Some people don’t like to have cash lying around. Okay, so don’t let it just lie around! I found the following ideas very helpful for places you can keep your emergency fund. They offer ideas for amounts you should keep stashed, but of course, you can create an emergency fund that suits you and fits your emergency fund needs.
“The first attribute of a good emergency fund is liquidity — as in, you need to get at these funds within a few hours. The second attribute is safety, meaning it can’t be tied up in an asset that could fluctuate in the short run, causing it to be underwater when you need to make that quick withdrawal. There are a few alternatives that pass the liquidity and safety tests:
1. Your mattress. It may not be politically correct to say this these days, but few options beat your mattress for liquidity. Another reason to keep at least a couple of hundred dollars in cash somewhere in your home? When a disaster strikes and the power goes out, you may find that the stores and other places you could ordinarily process debit or credit cards — and/or your friendly ATM — may be out of power (or out of cash).
2. Savings account. In my opinion, the lowly savings account is by far the best place to store most of your emergency fund. The deposits held in an ordinary online savings account are protected against bank failure by the FDIC, and you can get quick access to your money whenever you need it. Most online savings accounts allow you to transfer the money to the account backing your debit or credit card, so you can usually pay for what you need within minutes.
3. Certificates of Deposit (CDs). A CD usually pays more than a savings account. Granted, you still need a microscope these days to tell if you earned any interest — but every little bit helps, as my wife likes to point out. For higher liquidity, no-penalty CDs are available, or you can ladder your conventional CDs to greatly increase liquidity. And, of course, CDs are protected by the FDIC too.
4. Prepaid credit or debit card. This is handy, especially for travel emergencies. If your first stop after an emergency is a hospital, you don’t have time to access savings accounts and things like that. Having a prepaid card handy will often take care of your immediate needs, giving you time to mobilize your second and third lines of defense.
Your best emergency fund strategy
The downside of the four suggestions above is they pay no interest, or close to nothing. When you look at the gamut of emergencies against which the fund is meant to protect, you find that, as the amounts increase, the probability you’ll need that entire amount decreases. For instance, if you lose your job, you’re not going to need all 12 months of your emergency fund right away.
The longer you tie your money up, the more you get in terms of interest. That being the case, you might want to consider various layers of funds for your emergency fund money:
- A few hundred dollars in cash for really quick access in case of a power emergency
- A few hundred dollars on a prepaid card
- A bigger chunk in an online saving account or no-penalty certificate of deposit.
- A chunk in conventional CDs, laddered for staggered maturities.
Which proportions should go into each account will depend on your situation and the emergencies for which you are preparing. In addition, take into account that interest rates are expected to rise in the coming years.”