An emergency fund is an account you use to cover things such as serious illness, the loss of a job, or any major unexpected expense. An emergency fund keeps you from living on the financial edge and can give you peace of mind. Everyone needs to have money set aside for emergencies.
Be sure not to neglect or postpone setting up an emergency fund. This is a crucial step on the road to early retirement. It’s tempting to do something more exciting with your money such as investing it. While investing your money is extremely important you want to make sure you are on a sturdy financial foundation before anything. Below you can find out just how much you need and where you should keep your emergency fund.
How Much Should I Keep In My Emergency Fund
If you’re young and don’t have a family you should keep at least 3-6 months of living expenses. If you have a family I would recommend at least 1 year of living expenses. If you are in or nearing retirement it would be good to have 2 or more years of living expenses. These numbers are just basic guidelines. You can certainly put away more money than this if you would like to. Make sure you have enough that you can feel comfortable.
Where Should I Keep My Emergency Fund
Keep your emergency fund in a safe, liquid account. You can put the entire amount in a bank checking or savings account if you like. You could also put half in a bank account and half in something that will yield more interest than a bank account such as a short term bond fund. The short term bond fund is still very safe and you can withdraw your money within a few days but will probably return more than a savings account at a bank. Don’t put your emergency fund in anything more risky than short term bonds. Investments such as stocks are great for long term growth but are too volatile for this purpose. Below is a list of suitable funds for your emergency fund. Although these are all great options I think It’s still good to have a portion of your emergency fund in cash in a bank account.
- Vanguard Short Term Corporate Bond Index Fund
- Vanguard Short Term Treasury Fund
- Vanguard Short Term Bond Index Fund
The Corporate Bond Index owns bonds from U.S. companies with durations from 1-5 years. It may be more volatile than the other two choices but will most likely yield the highest. The short term treasury fund is the least risky of the three and it invests in treasury bills issued from the United States Government. The Short Term Bond index Fund invests in both corporate bonds and government treasury bills and is somewhat of a middle ground between the other two choices. Remember to keep this portion of your emergency fund in a taxable brokerage account rather than a tax advantaged retirement account.
I hope you found this article informative. If you have any questions or comments please leave me a comment and I will respond as soon as possible. Thanks!!!