On the Road to Wealth: Emergency Fund 101
Anybody can accumulate riches but in order to obtain financial wealth one must act with discipline and plan strategically. Riches are fun but they are also temporary, when you have the ability to turn your financial riches into wealth you set yourself up to be able to live comfortably for the long-term, bypass financial roadblocks with ease, and have financial security on your rainy days. You don't have to have a 6 figure salary to accumulate wealth, you just need to be smart with the money that you do earn and employ strategies to make that money work for you!
There are a number of strategies to be employed on one's journey to wealth. However, any financial expert will tell you that the first steps anyone should take on their path to building financial security are to get out of debt and build an emergency fund. This article will focus on the latter.
What is an emergency fund?
An emergency fund is an account that houses money for emergencies. An emergency is not "Macy's is having a 20% off sale and I need a new purse so let me dig into my emergency fund"; We're talking emergencies such as a a flat tire when you didn't budget for new tires, an unexpected medical bill, living expenses after losing a job, etc. Emergency funds should only be used during serious emergencies requiring financial expenditure outside of a budget or during times of financial hardship (a.k.a rainy days).
How much money should be in an emergency fund?
The rule of thumb is that an emergency fund should house at least 3 to 6 months worth of living expenses. However, if you are currently in debt it is suggested that while you work your way out of debt you save at least $1000 in your emergency fund as a cushion. Otherwise in order to determine the amount to be saved, one should calculate their monthly living expenses and multiply that number times the number of months to have an idea of how much money should always be available in their emergency fund.
Whenever money is used from an emergency fund it would would be wise to make contributions into the fund from each paycheck until that money has been replaced. Make sure to account for any changes in living expenses as they occur and adjust the emergency fund accordingly.
Where should I keep my emergency funds?
Emergency funds should be housed in a liquid account that is not too easily accessible. In other words, an emergency account needs to house funds that are easily available to be withdrawn in the case of an emergency, but not as easy as a checking account with a debit card.
Another thing to consider when deciding where to house your emergency fund is the interest that the account will accrue over time. An emergency fund is not meant to be accessed often, but whenever we allow money to sit, we should not let it sit stagnant. Remember what I said about making your money work for you? That comes into play now as we talk about interest-bearing accounts. You want your emergency fund to be housed in an account that accrues interest, that way while you aren't using the money it will grow.
There are many types of accounts that bear interest, are liquid and are not too easily accessible. My personal emergency fund is housed in a High-Yield Savings account, these are savings accounts that have significantly higher interest-rates than typical savings accounts. Most only only allow withdrawals 6 times per calendar month and do not have bank cards tied to them. If you choose to house your funs in a high-yield savings account take some time to research the various accounts available and choose the one that work's best for you. Some things to consider when choosing an account:
The Interest Rate and Any Terms / Conditions of Those Rates
The Minimum Required Account Balance
Fees Associated with the Account
Here are a few links to some resources that should help propagate your research into emergency funds and high-yield savings accounts:
Money Under 30 - Emergency Funds: Everything you need to know
Dave Ramsey - A Quick guide to your emergency fund
Bankrate - Best high-yield savings accounts in December 2020
I hope that you found this article useful and are ready to join me on the journey to wealth.
*As you read the articles in this series please be advised that I am not a financial expert and these articles are not intended to serve as financial advisement. These articles are intended to provide you with information that can guide your personal financial research. I can only share what I've learned from other financial experts, research of my own, and personal experience. If there comes a time where you need to make important financial decisions please consult a financial advisor. *
Founder & CEO of Hey Beautiful Inc