Planning for An Emergency: Emergency Funds and What You Need

If there is one thing certain in life, it’s that you can always plan for the unexpected. It can be stressful when life’s little emergencies pop up and you don’t have the financial safety net to cover the expenses. Here are the funds you need while planning for emergencies.

General Emergency Fund

A general emergency fund is setup to provide cushion during a lay off or big life transition. It can also be useful for unexpected events such as traveling to see a sick family member in the hospital. It provides peace of mind that if something goes wrong, you have the funds to see you through a crisis.

How much should you save?

For your general emergency fund you should strive to save 3-6 months worth of household expenses. This includes your mortgage, bills, groceries, & gas.

Car Maintenance Emergency Fund

If you own a vehicle you can be guaranteed that you will need to invest money into maintaining it. If you fail to maintain it, you can be assured that it will break down at some point. Cars are notorious for breaking down at the wrong moments, such as during a vacation. Having a car maintenance emergency fund will make a stressful time a whole lot easier when you can afford whatever repairs come your way.

How much should you save?

It is wise to save $75 per vehicle each month. Let this account continue to grow. You can use the money set aside for registration fees, routine maintenance such as oil changes and servicing, and also big repairs that are needed.

Home Maintenance Emergency Fund

An inevitable part of homeownership is keeping up with the maintenance on a home. At times it may feel like just as one project is completed, there’s another right behind it. While you have insurance for when some type of disaster may occur, it does not cover the routine maintenance of your home. Having a home maintenance emergency fund set up will be paramount when your HVAC system breaks in the middle of summer or your toilet stops working and you need to pay a plumber to come and fix it.

How much should you save?

You should strive to save about 1% of your home’s value into a home maintenance account annually. This means if your home is worth $240,000, you’ll want to save $2400 each year. You can divide that into $200 monthly. If you have to access your home maintenance account at some point during the year you don’t have to worry about putting back the full amount used, just keep saving the monthly amount to keep protecting yourself against those repairs that pop up around the house.

Medical Emergency Fund

During a medical emergency, the last thing you need to be stressed about is money. It is part of sound financial health to set aside money to help you during times of medical crisis. At the very least it is smart to set aside your deductible into a separate savings account each year. Also consider secondary expenses such as prescription copays, over the counter medicines, and medical supplies for aches and injuries. Buying heating pads, cough medicine or allergy medicine can add up over time. If a quite a bit of time has gone by without touching your medical fund you may feel safe to start depositing a smaller amount into it each month.

How much should you save?

This amount will differ form one household to the next, as each individual has different medical needs. Try to save up enough to have a full year’s deductible sitting in an account. Take your annual deductible, divide it by 12, and start setting aside that amount monthly. Factor in your copay for prescriptions and add another $25-$30 for miscellaneous medical expenses that pop up.

What Type of Account Should Your Emergency Fund Be In?

Your emergency funds are not investment vehicles. Their purpose is to help ease your situation and insure you during emergent events- not to gain a large amount of interest. Therefore, it is advisable to keep your emergency funds in accounts that are easily accessible, gain some interest, and have no penalties to withdraw from them. A money market is a great account that meets all of these criteria.

Don’t Save More Than Necessary

Keep in mind, that emergency accounts should be saved for just those reasons. Once you’ve saved enough money in those accounts, there is no need to add a superfluous amount. Any money beyond what will protect you during emergencies should be put into an investment product where your money will yield a greater return on investment.

Determine what your cap will be for each emergency to avoid depositing too much into each account. If you need to access any of your emergency accounts you can start depositing money back into them once your situation has resolved.

Time and experience have a way of teaching everyone that life is full of the unexpected and even a few emergencies along the way. Having the appropriate emergency funds set up can provide peace of mind during life’s stressful moments. Email Carolina Money Minders today so we can discuss the right amounts of emergency savings for your family, and how to properly allocate your savings.