Building an Emergency Fund: Why, How Much and When?

If recent events in California, Texas, Florida and Puerto Rico have
demonstrated anything, it’s that the unexpected happens. If you were forced
to abandon your home and all of your possessions on a moment’s notice,
would you have cash set aside to tide you over until you could return?
While getting a

homeowners insurance quote online

and finding a policy is a good way to start ensuring you’re protected,
building an emergency fund is essential to your wellbeing. Here’s more
about why, how much to save and when to do so.

Defining an Emergency

For these purposes,

an emergency is defined

as something capable of rendering you homeless, threatening your health or
eradicating your ability to earn money. Unless the incident falls into one
of those categories, it’s probably a want rather than a need.

If you’re like most people, having that kind of cash just sitting there is
going to tempt you to do something “fun” with it. But let’s say you go out
and replace your car with a newer model using a portion of the fund. Then,
three weeks later, a natural disaster strikes. You’re going to wish you had
the money a lot more than you’ll appreciate the nicer car.

Why?

If you lose everything, or experience a relatively minor calamity causing a
significant unexpected expense, you’re far better off using liquid capital
than going into debt. Yes, credit cards can come in handy and they do have
their place, but if you can avoid getting interest charges tacked onto what
are already unanticipated expenditures, you’ll be much better off in the
long run.

How Much?

The answer to
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this one varies significantly

depending upon your lifestyle. Granted, if you’re used to eating in
five-star restaurants when things are going smoothly, you’ll probably go to
the grocery store (if they’re open) in emergency situations. But let’s say
you unexpectedly lose your job. You should have at least three to six
months of living expenses squirreled away to cover you while you get back
on your feet.

When?

Just like farmers on the prairie, one should always make hay when the sun
shines. In other words, the best time to start is right now. Take a look at
your budget with an eye toward slicing bits off here and there to build
your fund. Once you’ve hit your target, keep putting money away for other
situations, since you’re used to saving money anyway.

Where to Keep It

Most financial advisors recommend keeping emergency funds in a
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high-yield savings account

. This makes access penalty-free should you need the cash quickly. However,
it also positions the money to accumulate interest, which helps the fund
grow itself over time.

Understanding why, how much and when to build an emergency fund—and doing
so—will enhance your peace of mind should the unthinkable occur. Building
liquid capital is the best way to protect yourself against disaster. You’ll
also want to protect your home, possessions and finances with insurance. Get a quick
homeowners insurance quote online with CoverHound!