Building emergency funds

Building an emergency fund is essential to your financial well being, since you’re rarely given advance notice of job cutbacks or an accident that keeps you out of work for an extended period. The likely alternative to an emergency fund — charging everything on your credit card and paying back the debt later at a high interest rate — could set you back significantly in your overall financial plan, even if your credit lines were large enough to cover all the bills.

You’ll want a substantial part of your emergency fund to be low risk and extremely liquid, meaning you can access your cash easily and quickly. By putting the money in a low-risk account, you won’t have to worry that your investments will have lost value if you need money right away. And if some of your assets are in a savings or money market account, you’ll be able to get money from an ATM or just write a check if you’re in a pinch.

You might want to put the rest of your emergency funds in short-term U.S. Treasury bills and certificates of deposit (CDs), since your need for back-up cash may extend for several months. And you can always sell T-bills or cash in CDs early if you need to. You could lose some interest, but if an emergency doesn’t materialize, you are likely to earn more than with regular savings.

Louise Yamada,
Managing Director,
Louise Yamada Associates

According to Louise Yamada, building an emergency fund should be a financial priority.

If you’re just getting started creating a financial plan, building an emergency fund should probably be one of your primary financial goals — especially if you don’t already have funds in the bank to cover unanticipated expenses. The one thing that might take precedence is paying off any high interest rate debt.

BACK