I’ve read a few articles about emergency funds recently that make me worry a bit. Seems Americans aren’t saving as much as they should and if they are it’s in all the wrong places.
In a recent Smart Money article (April 2012- Fatten Your Reserves) they cite a bankrate.com study that shows only 24% of Americans hold a 6 month emergency fund and 25% have no savings at all.
This article went on to state that Americans are using alternative methods instead of a traditional savings account like borrowing from 401K, home equity, and insurance. I disagree and believe going down this path will bring more financial disater in the end as these alternatives come with very high risks.
Emergency Funds: The Basics
An emergency fund’s purpose is to shield you from unexpected events and emergencies. There are some basics we must remember about Emergency Funds.
1. Keep it Liquid- No, not in water, but keep it easily accessible. Don’t tie up your emergency fund in hard assets like your home, CD’s, investments. If an emergency happens, you need that money now, not in a several days or weeks that include paperwork and red tape.
It is wise to keep your emergency fund in a high interest saving account or Money Market account with check writing privileges. (Find one now)