How To Build An Emergency Fund?

Answer 1

For many people all across the country, there may be no more important investment they make than to build an emergency fund. This would be the rainy day fund that could be accessed should any major unforeseen event occur in your life. Experts generally agree that you should keep around six months of living expenses in an emergency fund although you can keep a little less if you're lower risk such as having low risk of job loss or a little more if you're higher risk such as having poor health.

But how you build your emergency fund can be just as important as whether you have one. Emergency funds are designed to be very low risk, safe and secure investments. Obviously, if you ever need to access your emergency fund you'll want to make quite sure that the money is there. Therefore, many of the investments you hold in your IRAs, 401(k)s and other accounts should not be considered for an emergency fund.

Again, you should aim for six months of expenses in your emergency fund but if you don't have that much to put in right away (and most people don't), start with an automatic investment plan. This way you can sock away a little at a time until you reach that six month mark. Some investment firms will even allow you to start with a low initial minimum investment if you pledge to continue adding to it regularly.

Only the safest investments should be chosen for an emergency fund. Things like money market accounts, treasury bills and CDs make ideal choices for emergency funds due to their safety and stability. Things like stocks, international funds and long-term bonds should be avoided. The temptation to earn a higher return might steer you towards these investments but with emergency funds principal preservation should be your #1 goal, not earning a high return.

Starting a fund is crucial to giving yourself some financial stability and peace of mind. Build it the right way to ensure it will be there in case you ever need it.