One of the most overlooked home maintenance routines is the most costly....not having an emergency fund.
Home maintenance is a necessary chore to avoid neglect and prevent disasters from happening. That’s why we put fences around garden ponds or bars on windows – to make sure that the family stays safe and the worst will never occur.
Having an emergency savings fund is just as important as installing smoke detectors.
Financial planners suggest keeping between three and six months’ worth of living expenses in such a fund. The question is, what is a real emergency that warrants breaking into the emergency savings fund: repairing your washing machine, sudden illness or current market conditions?
Many people think they can place their emergency funds in investments and, if they need money, they can either sell or else take a loan (credit card loan, line of credit against their house, etc.). But what happens if those sources of liquidity dry up?
Sometimes the market may drop dramatically. In this situation, if your emergency fund is in stocks, its value could be severely diminished. What if there’s another credit crunch, just as there was in 2008, with banks unwilling/unable to lend out money? At that time, even solid companies had trouble getting short-term loans...which are the life-blood of the economy. If firms cannot get a loan, imagine how much harder it is for an individual in such a situation.
Where should you keep your emergency fund?
Many clients use money market funds connected to their brokerage accounts to benefit from liquidity and easy access using checks and/or a debit card. Though money market funds are considered conservative investment choices, they are normally not insured. For an even safer bet, consider short-term Certificates of Deposit (CDs), which, if purchased through an American bank, have FDIC insurance.
By definition, an emergency is something unexpected. However, it’s in your power to make sure you have the funds necessary to deal with a crisis. Don't overlook this crucial piece of home maintenance to make sure that your family and home continue to run smoothly.
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special needs. Past performance is no guarantee of future returns.