Life happens, whether we want it to or not. Your car's transmission breaks. You tell your child to "break a leg" figuratively, and they do it literally. Perhaps there's a distant funeral to attend and you need plane tickets. Emergencies are a part of life, but far from ideal when it ends up breaking your budget. A sound financial plan should include an emergency fund, which provides readily accessible cash to pay for immediate, urgent requirements.
What Is an Emergency Fund?
An emergency fund is a category of savings dedicated exclusively to urgent, unplanned expenses. With an adequate emergency fund, you have money available for disasters or other adverse events without using credit cards or loans. AAFMAA Wealth Management & Trust (AWM&T) can help with this type of financial planning; offering peace of mind for your family, so you can meet emergencies without destroying your budget or retirement savings.
How Much Money Should Be Kept in an Emergency Fund?
Most financial advisors recommend an emergency fund between two and six months of living expenses. For a military family with a good credit history, two months' base pay is usually sufficient; however, if you have weak credit, a poor health history, or a complicated financial situation, six months' worth of expenses is more prudent.
For example, a military family with $2,000 per month in living expenses should save between $4,000 and $12,000 for an emergency fund. The following breakdown is a representative example of these expenses:
|
Expense
|
Cost
|
|
Mortgage/Rent
|
$1,000
|
|
Utilities
|
$250
|
|
Food
|
$350
|
|
Insurance
|
$100
|
|
Fuel/Transportation
|
$200
|
|
Phone
|
$100
|
|
Total:
|
$2,000
|
|
2 Mo. Savings (x2)
|
$4,000
|
|
6 Mo. Savings (x6)
|
$12,000
|
Where Should I Keep My Emergency Fund?
You want to have quick access to your money in the event of an emergency. Thus, it's a good idea to save emergency funds in a liquid account. This makes bank and credit union savings accounts ideal for emergency funds. Some financial institutions also offer high-yield savings accounts, certificates of deposit, and money market funds that may earn more interest.
These accounts are suitable for an emergency fund, as long as the institution places no restrictions on how quickly you can access the cash. Ideally, your emergency fund account would also have check-writing privileges.
I Don’t Have an Emergency Fund. Where Should I Start?
An emergency fund is a foundational part of a sound financial plan. Once you have a budget in place, keep saving towards a $1,000 emergency fund. Saving $100 per month will reach that goal in less than a year.
The next step is saving two months' living expenses. Using our example above, this equals $4,000. By saving $200 per month, you will reach this next goal in 15 months. By consistently saving small amounts toward your emergency fund, you save the minimum recommended emergency fund in less than two years while placing yourself in a more secure financial situation in the process.
AWM&T Relationship Managers are ready to help answer any questions you may have regarding emergency funds, asset management, estate planning, or retirement planning. Contact us today for your complimentary portfolio review!
This article was originally published June 2, 2020.