Why You Should Have an Emergency Savings Fund
October 29, 2019 • 3 mins
Imagine you have an emergency that puts you out of work – it could be unemployment or a medical condition you need to take care of. First, consider how you feel if you had no savings. Next, consider how you would feel if you had saved up for an emergency – meaning you could continue to pay for necessary expenses while having three months to deal with the unexpected circumstances. The sense of assurance you would have from the savings is integral for your financial well-being.
In fact, having an emergency savings fund has a lot of benefits:
It’s an important money management tool – once you save money for an emergency fund, you’ll see that you can save money for any financial goal that you have.
It gives you an intermediate funding source – a halfway point between your monthly paycheck and your investment accounts. This protects your long-term investments for things like buying a home and retiring.
It will make the ups and downs of life – such as changes in your workplace and the wide swings of the stock market – more emotionally tolerable, because you know that your financial survival isn’t at stake when your job or Wall Street changes.
An emergency savings fund will make the ups and downs of life more emotionally tolerable."
Where you should put your emergency fund or cash reserve
You'll want to make sure that your emergency fund is readily available when you need it. But this doesn’t mean that an NCUA-insured savings account is your only option. (An NCUA-insured account is an account that the NCUA has guaranteed will have available funds – similar to an FDIC-insured account you could open at a bank.)
One alternative is a money market account. These accounts typically offer higher interest rates than a regular savings account, with little (if any) increased risk. To encourage saving, Patelco offers a market-beating rate on small balances in our money market account – perfect to get your emergency fund started.
You shouldn’t confuse a money market mutual fund with a money market deposit account. Money in a mutual fund is not insured or guaranteed by the FDIC or NCUA. Stocks are not a good idea for your emergency fund either, as they are too violate. And bonds are typically too long-term and don’t have the liquidity of a deposit account or share certificate.
A final option is a certificate of deposit, which is an account that pledges to return your principal plus interest on a given date – and usually pays a higher interest rate than a typical savings account. It's important to remember that most certificates impose a penalty for early withdrawals. So, if you're going to use certificates as part of your cash reserve, you'll want to be sure to ladder (stagger) their maturity dates over a short period of time (e.g., two to five months). This will ensure the availability of funds to meet sudden financial needs.
Review your emergency savings fund periodically
Your circumstances and financial obligations change – such as the birth of a child, an aging parent becoming more dependent, or a new vehicle payment. Because your cash reserve is the first line of protection against financial emergencies, you should review the amount at least once a year to make sure that it fits your current needs.
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