It never fails.
Just when you think you’re getting ahead financially, something unexpected happens:
- Furnace quits, air conditioning goes, washer or dryer dies, refrigerator stops working.
- Car breaks down, roof leaks, basement floods.
- Kids need braces, family member goes in for surgery, you’re downsized, fired or laid off.
No sweat . . . if you have emergency funds
If you saved for such setbacks, you can simply tap into your emergency fund . . . and go on living as usual. If you don’t have money set aside, however, you’re stuck! The cost of life’s little surprises can be even higher if you’re forced to put unexpected expenses on credit cards or take out loans to pay them. Both options could double or triple the cost of catastrophes over the time it takes to pay off bills with interest.
Of course, something else always goes to pieces while you’re still making payments on the first emergency. Like death and taxes, you can count on it. By then, your credit cards may be maxed out and your loan options slim, so you have no choice but to withdraw from your retirement funds. In other words, you rob your future to scrape by in the present. Now, you also pay taxes and penalties for early withdrawal. Once you fall that far behind, you worry about words like repossession and foreclosure.
Advanced Asset Management’s certified financial planner Ronald Van Surksum advises his clients to prevent bankruptcy in emergencies by saving funds to fall back on. “For most families,” he says, “savings that equal three to six months of household income can get you through a typical crisis.”
Saving for emergencies might be easier than you think. You can start building your rainy day fund with small monthly deposits. According to Van Surksum, your emergency funds can be put into investments like short-term bonds, municipal bonds, even small portions of dividend-paying stock. That way, your fund grows just like any other investment while you’re saving to pay for potential problems.
Emergency funds: Savings that equal three to six months of your income
An emergency fund doesn’t have to sit in a bank account gathering dust. If invested wisely, those savings can work for you, actually gaining returns rather than losing more money on unnecessary expenses like credit card fees, bank loan interest or penalties. If you’re lucky, you may never need to tap into your emergency fund. You’ll build up a nice little nest egg instead.