Money Matters – Show Me The Money: An Emergency Fund
BOSTON (CBS) – Another good use of your refund is to earmark the money for an emergency fund.
According to the 2010 MetLife American Dream survey 55% of consumers could not take care of expenses for more than two months if an emergency should arrive.
That’s not enough! Everyone needs a rainy day fund! This is savings set aside for an emergency. I like to refer to it as a Cash Stash.
Your emergency fund should be for an emergency of biblical proportions, you know the kind when it rains so hard and so long that the creeks and rivers rise and the basement floods! Or the sewer lines become flooded and are backing up into your bathroom. Or you can’t work because your facility is under water and the unemployment check is not going to be enough. Sound familiar?
Or it could be an illness that keeps you out of work. It may be helping out one of your kids or your parents with a financial crisis. You plan for such emergencies by having money saved in an emergency fund.
I’m big on planning and would want everyone prepared for any emergency that comes their way. So how much do you need in your Cash Stash? Figure out how much you need for living expenses each month, not the extras, the basics like the mortgage, insurance, gas, food etc.
Bare minimum for everyone: 3 months of living expenses
Children & 2 steady incomes: 3-6 months of living expenses
Children & 1 steady income: 4-6 months of living expenses
Children & no steady income: 6-9 months of living expenses
No steady income refers to those who have seasonal jobs like landscaping or get paid by earning a commission such as real estate agents. You may need even more of a cushion to get you through the tough times. Consider what the housing market is doing right now. Not much! So they are not earning very much but they still need to feed their family.
Your emergency fund should not be used as a vacation fund or a Christmas club. This is “you are out of work and need to pay the mortgage” money.
A money market account, a savings account, EE bonds or I Bonds are good places to stash your cash. I realize they are not paying a lot of interest right now but you have access to the money, which is the important thing.
EE bonds are paying 0.6% through May first. Short term CDs are around 1%. Mutual fund money markets with check writing privileges are under 1%. Interest rates will probably stay low thru the fall.