Unfortunately, accidents happen all the time. A variety of situations can suddenly arise that impact your financial state such as medical expenses, necessary car repairs, and job layoffs. Having an emergency fund is a simple way to help protect yourself during these times when you need a little extra cash. While this extra protection can be very helpful, many people do not have an emergency fund. An article by Fidelity Investments states, “About 3 in 10 Americans would have trouble paying their bills in full if they had to pay for an unexpected expense of $400.” If you are setting up an emergency fund, here are three questions to help you get started.
How much should you save?
Fidelity and a variety of other financial institutions recommend putting 3 to 6 months’ worth of living expenses away. The amount should consider several factors, including how much you spend monthly on living expenses, the number of dependents you support, and your personal responsibilities. There is no magic number you should be aiming for, because everyone’s circumstances and needs are different. Talking with your financial advisor can help you determine how much you should save for your needs.
Where does the money come from?
There are ways you can find money to put into an emergency fund even if you’re operating under a tight budget. Thinking of your fund contributions as a bill payment rather than an investment option can help rewire your mindset to feel more compelled to contribute. Whether you’re contributing from your income or a tax return, developing a consistent contribution schedule can help it feel more of a habit than a hassle.
Where should I put the savings?
While there is an array of options to store your funds, it is important to be aware of the stipulations of the investment vehicle you choose, such as taxes or penalties. Investing your emergency fund in an IRA or similar product can lead to the investor paying both taxes and penalties. Keeping your funds in liquid accounts, such as CDs or money markets, can make it simpler to access the funds without paying extra for accessing them.
While no one knows when an emergency will happen, having an emergency fund can help you be more prepared for the unexpected. A financial advisor can help evaluate your specific needs and develop a plan for your emergency fund.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through GWM Advisors, a registered investment advisor. GWM Advisors, Southern Point Investment Partners, and Fidelity Investments are separate entities from LPL Financial.