The first step in every financial plan required to build a solid foundation is to have an emergency fund. The overall purpose of an emergency fund is to have accumulated funds available when unexpected financial strains occur. Unlike most financial advisers, my view of the emergency fund is two-fold.
Emergency Fund – Long-Term Focus
The emergency fund which most financial people talk about relates to an accumulation of money with the goal of being able to cover at least the amount of your living expenses for six months. This is a long-term emergency fund because you may not use it for a long time, or ever. The accumulated funds should be reserved for use only in case you lose your job, you are sick/hurt and unable to work for a short period of time, and you are not receiving your full pay check. You should either put that money aside as one lump sum if able, or you can add to that account each month until the total reaches the goal of six months of your expenses. It is recommended that the long-term emergency fund be set up at an internet bank high yield savings account, or money market fund since they are less accessible to avoid temptation. A reliable source for finding the best high yield savings accounts, or money markets can be found at: bankrate.com/banking/savings/rates
Emergency Fund – Short-Term Focus
The second type of emergency fund that most financial advisers do not talk about is a basic emergency fund where the objective relates to effective cash flow and staying out of debt. The money should be used for unexpected events such as emergency home repairs, unexpected car repairs, paying insurance deductibles, or some other unexpected expense. It is recommended that the short-term emergency fund have at least two times your annual medical, home insurance, and car insurance deductible amounts as a baseline. An additional amount of twice what you would expect to pay out of pocket for a typical medical expense, car repair, home repair, or other short term emergency is accumulated in the fund. A savings account at a local bank where you have your checking account is a good option for the basic emergency fund to allow easy accessibility. You can move money into the account in a lump sum if able, or over time as a regular contribution, then replenish the account as you use the funds.