The first thing that any planner worth his/her salt does for a client is to establish an emergency fund. An emergency fund is made up of investments with liquidity and serves a multitude of purposes. Among these is covering unforeseen expenses, satisfying deductibles, car repairs, and home repairs.
Benefits of having an emergency fund:
- Covering higher levels of deductible making insurance policies much more affordable.
- It can be used to cover unforeseen expenses.
- As a source of liquidity when markets are too volatile to sell off investments.
- Used to cover loss of income due to extended medical leave or loss of employment.
A recent article I found in the Wall Street Journal stated that thirty-eight percent of the individuals surveyed weren't prepared to cover even a $500 car repair or a large medical bill. This is a result of living paycheck to paycheck. A good rule of thumb is to have three to six months of living expenses in reserve. The fund is accumulated a little at a time.
An Emergency fund should be kept in money market funds or as an alternate in short-term bond funds with low volatility investments.
Charles Shearman is a Certified Financial Planner with 32 years experience as a financial planner.