Emergency funds - those who have them do not sweat the little things.
Living in a society which encourages you to spend, spend, spend, it can be difficult to remember the power of having savings. Cash, however, creates opportunities that spending never can. An emergency fund is simply a savings account, and having one in the appropriate amount will change your life for the better. Why?
When something unexpected comes up, your emergency fund protects your other long term investments. You use your emergency funds so you don't have to withdraw from a retirement account and pay penalty taxes, or so you don't have to sell long term investments at a bad time. In addition, cash puts you in a position to buy when everyone else wants to sell, allowing you to make money in good and bad times.
Below are the top ten reasons to have an emergency fund. If you need some motivation to save a bit more, print the list below and tape it to your refrigerator door, put a copy on your desk at work or keep it in your car.
Read it frequently, until you can feel the power of cash; until saving feels better and more powerful than spending.
Top 10 Reasons to Have An Emergency Fund
- Protects your family in case of a job loss
- Provides reserves for health or other family emergencies
- Gives you the ability to pursue attractive investment opportunities as they come along
- Helps you negotiate lower prices on major purchases
- Keeps you from losing money since you won’t need to sell other investments during down markets
- Allows you to avoid tax penalties by having to pull money out of retirement accounts too early
- Reduces stress which increases health and well being
- Eliminates numerous marital arguments
- Creates a cushion to use for major household repairs
- Enables you to pursue bargain buying at someone else’s expense (someone who desperately needs cash)
How Much Should You Have in an Emergency Fund?
Good: At a minimum, you should have three months of living expenses in your emergency fund. This means if you need $3,000 a month to cover your basic needs like your mortgage or rent, utilities, gas and food, then you need $9,000 in your emergency fund.
Better: If you have people who depend on you financially, like children or a spouse, your emergency fund should be six months worth of living expenses.
Best: As you get better at saving, work toward accumulating 12 months of living expenses in a savings account.
Where Should You Invest Your Emergency Fund?
Where should you invest your cash reserves? In a safe investment. Read Making Safe Investments to learn more.