Saving for an Emergency
Create a financial safety net
Saving for a rainy day can be just as important as saving for a specific goal. What if you lose your job or have an illness or injury that keeps you from working? What if there’s a natural disaster? You never know when the unexpected will happen, but you can save to protect yourself in case it does.
How much do you need for an emergency?
It's generally recommended that you keep three to six months of necessary living expenses easily accessible in case of an emergency. (You can eliminate many discretionary expenses such as restaurants and entertainment.) This is your emergency fund. Also realize that you may want to save even more in your emergency fund if your job is in jeopardy or if you're feeling insecure about your financial future.
Where to keep your emergency fund
So you have fast access to your emergency cash, keep it in something safe and liquid such as one of the following:
- An interest-bearing checking account may provide a slightly lower yield than money market funds, but you can write checks for any amount and may have easy ATM access to cash. And they're FDIC insured, up to $250,000.
- A money market savings account may offer limited check-writing privileges (over certain minimums) while generally providing higher yields than a checking account. Often the number of withdrawals is limited.
- Money market funds typically pay more than bank accounts (checking and savings accounts). While money market funds are considered to be a stable investment, they are not FDIC insured, and it's possible to lose money invested in a fund.
- Short-term CDs are also FDIC insured up to $250,000, and CDs typically offer higher yields than money market funds or interest-bearing checking accounts. Although money invested in a CD is locked up until it matures, you can always withdraw early and pay a penalty if you really need the cash.
our two cents
|An Emergency Fund Helps You Avoid These Expensive Alternatives|
|If you ...||Then you ...|
|Withdraw 401(k) money before you're eligible||Pay early withdrawal penalties (10% or more)|
|Live off credit cards||Pay up to 18% interest (or more)|
|Postpone monthly payments||Pay late penalties, damage credit rating|
|Sell stock or mutual funds||Lose money if it's a bad time in the market|
our two cents
- Minimum balance requirements
- Service fees
- Interest rates
- How often the bank pays interest