Emergency Savings
Account
An easily accessible emergency savings account is one of the single most
important things you can do for your financial wellbeing. In the event that
disaster strikes, if you don't have enough set aside to cover basic living
expenses, including
mortgage, food, and car payments, things could quickly go
from bad to worse.
If setting aside this much
money seems unattainable, start small. Cut out those daily trips to the vending
machine. You'll be amazed how quickly the money adds up. Use cash gifts, tax
refunds and annual bonuses to build your fund. When you set up your monthly
spending plan, include a contribution to your emergency fund, and make it
automatic.
Your emergency savings account
needs to be easily accessible. That means in a savings or money market account,
not real estate investments or stocks. Select an account with no service fees,
which can be as high as $100 a year. Also, make sure you are getting a good
interest rate many online banks, like NetBank, EverBank or EmigrantDirect,
currently have savings accounts paying three to four percent that uses an
average daily balance instead of minimum daily balance.
This account should only
be used for real emergencies, not holiday spending sprees or other indulgences.
If you do draw from the account, make repaying it a top priority.
Lock it up and
hide the key
People who are living on a lean-and-mean budget will have the toughest time
setting aside money for emergencies. If it's possible to squeeze out another $40
or $50 each month and put it in a money market account, it's worth doing.
Treat the emergency fund like its a bill.
If you determine you need $3,000 in the fund, look at what
you can afford to save each month and use it as a bill to pay yourself. If it's
$100 a month, that's fine. Put it away and let it grow.
When you've saved the $3,000 you'll be in
the habit of putting away that $50 or $100 a month. Keep doing it. Maybe put it
in a non-retirement brokerage account."
Other experts echo the idea of treating the
emergency fund as a bill. Put the money away and don't be tempted by the latest
sale.
Putting money aside on your own is hard.
Retirement plans are successful because the money comes out of your paycheck
before you can get your hands on it and because there are taxes and penalties
for early withdrawals.
But stashing money in an easy access money
market account takes discipline.
Once you've got the money in your
checkbook, there are all these demands coming at you -- the
mortgage, taxes, the
kid's braces, McDonald's.
Then we have this idiot box, the TV, with
somebody yelling, 'Zero-percent interest, buy this now!' People get overwhelmed.
They know they're not supposed to spend the money, but they do."
Limiting your access to the emergency fund
may help. You need to have immediate access to some of the money, but not all of
it.
As you're growing your emergency fund,
consider keeping it in a money market account or fund until you have about two
months of living expenses. Move one month of expenses to a one-month CD. When
the CD matures, roll the principal and interest into another one-month CD.
All the while, continue
making regular payments to the emergency fund money market account. Eventually,
you'll have another month of living expenses that can be used to invest in a
two- or three-month CD. If you are opting to set aside six months of expenses,
continue the process until you can comfortably purchase a six-month CD.
Mortgage Glossary9
