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Investing for a successful financial future often begins by making sure there is very accessible, liquid money available for unexpected expenses in some type of emergency savings account. Astonishingly about 60% of Americans cannot afford to cover even $500 of unforeseen expenses. Of the remaining 40%, 21% have to resort to debt to cover their emergencies1. Clearly an established emergency savings fund not only is the basis for a solid financial plan, but it can also prevent individuals and families from dipping into retirement savings and increasing debt.
To determine what is a sufficient amount of funds in an emergency savings account, first determine your average monthly cost of living. This number is the sum of monthly variable and fixed expenses. The account should be liquid (funds are safe and available for withdrawal at any time) and consist of three to six months’ worth of living expenses. If it is a dual-income household, perhaps three months’ worth of expenses are appropriate. If the sources of income are only from one person or less certain in any way, then more should be put aside in this account, up to six months or even one year.
Examples of accounts that could serve as an emergency fund include checking, savings, money markets, and short-term CDs (even cash itself). Any asset not easy to withdraw from and/or containing some investment risk is generally not considered suitable for an emergency fund. Monitoring the emergency savings fund is key to maintaining sustainable savings levels. Life changing events such as marriage, the birth of a child, or retirement are reasons to reassess the monthly budget and adjust the savings account as needed. An emergency fund should be the foundation for any solid long-term plan.
Should you or someone you know have any questions about an emergency savings account, our Wealth Advisor team is available to discuss savings strategies.
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