Emergency Fund
It is important for everyone to create an emergency fund separate from other checking or investment accounts. An emergency fund is a pool of money that is put aside in order to aid people when unforeseen situations arise. At any given time, emergencies can arise that require us to spend large sums of our paycheck in order to correct. Whether our cars break down or we get laid off from our job or our child needs a surgery, one of the many constants in life is that life constantly changes. Therefore, to plan for those risks, it is usually advised that each of us put three to six months of expenses away untouched. Now obviously this is money that we could otherwise be putting towards our investments and we are losing out on returns. Therefore, rather than letting that money lay away as cash, we have an alternative that is just as liquid as a checking account. Money market funds hold many positions on short term securities. It offers the returns around four to five percent coupled with the liquidity to buy and sell at whim as well as write checks directly from the account. Then, as those money market funds grow, you can either reinvest those gains into other longer term investments, or transfer them to a checking account and treat them as cash. While traditional savings account usually offer a measly percent or two of returns, money market funds are an excellent choice for emergency short term funds. Keep a steady emergency funds account for those troublesome months but do not sacrifice the ability to invest and gain positive returns.
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