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What
if your car transmission goes out, your home computer crashes
or your washing machine is on its last leg? These unexpected
scenarios require immediate cash. Roofs leak and people get
laid off--it always seems that something expensive is sure
to happen when you least expect it. That's why you need to
be prepared by building an emergency cash reserve. Saving
for the unexpected protects and prepares you for life's expensive
surprises.
How Much is Enough?
Anywhere between two to six months of expense money should
be sufficient to create an adequate cushion for emergencies.
But everyone has a different financial comfort level and the
amount you should keep in reserves depends on two things:
your monthly expenses and the stability of your income.
- Monthly expenses. How much do you and your family
need to function comfortably each month? This figure should
include not only your fixed expenses--such as your mortgage
and car payments--but also your variable expenses--such
as phone, utilities, food, etc. Once you've determined your
monthly spending, you need to decide how many months of
expenses you need to set aside in your reserve.
-
Job stability. People with secure jobs, or families
with double incomes, may not need to put more than two-three
times their monthly expenses into an emergency fund. However,
if you are single with inconsistent income or work in an
extremely specialized field, you may want to save more than
six months of expenses. The point is to put enough away
to get you through rough times.
Where Do You Put It?
It's smart to choose safe, short-term, and liquid investments
for your emergency fund. Checking, savings and money market
accounts are good options. However, some investments--such
as U.S. Treasury bills or CDs--may provide higher returns.
You can wait until their maturity dates to pay off unexpected
bills or you can cash them in before they mature, though you
may lose some interest and be charged a penalty.
Once you decide the best vehicle for your reserve, leave
it alone! You should never use the funds unless you have an
emergency. The goal is to keep your reserve fully-funded at
all times so when the unexpected happens, you are fully prepared
with enough money to get you through it.
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