Putting money aside for a rainy day is one of those jobs I’ve been guilty of putting off but when the unexpected happens it’s a weight off your mind to know that you’ve got a contingency to rely on. Yet knowing how much and how best to put money aside can be unclear.  I get some advice from financial expert Natalie Hall to explain it all.

emergency_fund

What would happen if you suddenly need money? It could be a flood that would devastate the walls of your abode, or something personal like a car accident that would cut off your ability to go to work. Whatever it is, an emergency family fund is important for family.

An emergency fund is designed to cover a sudden shortfall when an unexpected emergency crops up. Your emergency fund should easily be accessible, is reliable, and it need to hold guaranteed investments. In other words, savings accounts are the best funds for emergency, while money invested on stocks are the worst.

A stock is an equity investment in a corporation which allows an investor to own a portion of the firm’s earnings and assets. According to financial advice site FXCM, stocks are denominated in “shares,” with “each share representing a small portion of ownership in a company.” The problem with companies is that they have the potential to go bankrupt and close down, which is true even big time companies like Apple. Several years ago, who would’ve thought that tech giant Blackberry would have so much losses that they almost applied for bankruptcy?

How big should your emergency fund be?

This depends on the size of your family, but the rule of hand is that the emergency fund should be able to cover 3-6 months of expenses in your account.

If you’re a couple who both earn money every month with no kids yet or other family obligations, then you probably won’t need a lot of emergency funds. The general rule of 3-6 months in your emergency expenses should be ok.

If you have kids, however, who go to school and have special needs such as monthly medicine for allergies, you might want to increase it to 7-8. Your emergency funds should adjust to your family’s lifestyle, and if you have high monthly expenses, then, you obviously need to save more.

Where should you put your money?

This is the most important thing. Should you keep the funds at home or put in a bank?

The answer is both. You can follow the 80/20 rule. 80% should go to the bank since the interest rate will augment the funds over time. About 20% should stay at home, which should be used for buying basic necessities like food and gas in case of natural disasters. When you put your money in banks, you can either choose FDIC (banks) or NCUA (credit unions).

Brick and Mortar Banks

Most people are already familiar how this works. One of the advantages of putting your money in a bank account is convenience. Check your bank rates before opening with one, as you will always find a company that offers a slightly higher rate than others.

Credit Unions

Because credit unions are non-profit and member owned, you will find that they sometimes offer a much better deal than local banks. The only drawback here is that there aren’t a lot of branches of credit unions so you’d be giving up convenience.

Online Banks

Like brick-and-mortar banks, online banks can give you security and convenience when it comes to depositing and withdrawing money. Their interest rates, however, are not as high as brick-and-mortar banks but you can do banking anywhere with online.

Continue saving while paying your debts

When people finally have a hefty emergency fund, they tend to think that it can be substituted to paying debt. This should never happen. As the name implies, emergency funds should only be used for emergencies. Every salary day, people should be smart about where they should put their money and if you haven’t started making an emergency fund yet, there’s no better time to start than now.

 

Disclaimer: This is a contributed post written by Natalie Hall. Natalie has been a day trader for 7 years now. She regularly contributes articles to 3 independent news sites, as well as provide financial advice to private individuals. In her free time, she likes watching her favourite Sci-fi films with Jimmy, her 6-year-old son.

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