Financial Answer Center
Building a Savings Plan
- Introduction
- Priorities
- Goals
- Income Versus Expenses
- Future Cash Flow
- Creative Ways to Start Saving
- The Time Value of Money
- Painless Ways to Boost Savings
- The Need for an Emergency Fund
The Need for an Emergency Fund
It is generally recommended that you have cash funds sufficient to cover three months of expenses. Some of these funds cover operating expenses, while the remaining serves as an emergency fund.
Ideally, the money you need should be in places that are easy to get to, e.g., bank and credit union savings accounts, and bank, credit union and money market accounts. These are liquid. You can turn them into dollar bills easily.
Although they are generally regarded as lower-risk, you should know that money market accounts are not federally insured (the way most banks are for deposits of up to $250,000).
If you don't have any cash reserves, here are some other sources of emergency funds:
- A home equity loan or line of credit (You should establish this now if you think you will need it in the future).
- Cashing in investments
- A loan on a margin account (if you own securities)
- A loan from a permanent insurance policy
- A personal loan from your bank or credit union
- A loan from your savings plan
- Credit cards (the LEAST favorable option)
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