You’ve probably been told before to prepare for the unexpected, and that’s good advice. And being prepared for the unexpected includes your finances as well. In the event of a job loss, medical expense, or other form of unexpected financial damage, it’s important to have an emergency fund. So once you’ve asked yourself what’s the worst thing that could happen to you financially, you’ll need to figure out what you’d need should disaster strike…
First, ask yourself several questions:
- Do you have some form of income continuation in the event that you lose your job?
- Do you have untapped credit that you could use to tide you over?
If the answer to both of these questions is “yes”, you may not need a whole lot of emergency savings (your checking account alone may be sufficient). This, of course, varies on a case-by-case basis.
However, if the answer to one or both of the questions is “no”, you should probably be putting together some extra savings in case of a financial emergency. Typically these funds contain between three to six months wages, although your individual circumstances could necessitate that that number be higher or lower.
Because in an emergency your money would need to be easily accessible, it limits the options that you’d otherwise have for investing. Your first option is bank deposits. Whether its checking, savings, or money market, the investment will be both safe, secure, and readily accessible. The downside is that you won’t likely make much in terms of interest.
A second option that you have is short term treasuries. The federal government offers short term treasuries every week that pay a set rate of interest. What’s more, there’s no set penalty on the sale of treasury bills before they reach maturity (aside from simply not receiving the interest that you’d otherwise get). Treasury yields vary based on the market interest rates at the time they’re sold and the duration of time your money is invested.
Your third option is to invest in money market mutual funds. With this investment, you are for all intents and purposes buying into a pool of Treasury bills, corporate lOUs, and short-term bank deposits. The rate of return will vary, but will generally correspond to the current yield on treasury bills and bank deposits. Accessing your funds is usually as simple as writing a check, although there may be a limit on how often you can access your funds. Be sure to read the prospectus (which spells out rules and other important information) before investing in money market mutual funds.
This little guide is by no means comprehensive, and you may want to seek out the advice of a financial planner first before making any decisions. But the important thing is that you have a fallback set of funds in case some sort of tragedy happens to you and/or your family. It’s also important to keep track of these funds properly.