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Emergency Funds: Just How Much is Enough?

It’s tough to pin down the right amount of reserve cash you may need for the unexpected, for the sole reason that an emergency fund is used for just that—an unplanned event.

Whether it’s a layoff, medical emergency, property damage or car accident, an emergency not only carries a hefty price tag, but a great deal of grief and stress. Why intensify your anguish with financial strain?

As a general rule of thumb, 3 to 6 months of living expenses should be available at a moment’s notice—more if you support a family. Yet, a recent survey conducted by consumer financial services company Bankrate found that 63% of Americans have less than $500 in emergency savings, an amount that, for most people, doesn’t even cover a single month’s rent or mortgage payment. The good news is that this disconnect between devastating debt and financial freedom can be avoided with a bit of planning and sensible saving.

Thinking of Your Credit Card as a Safety Net?

Relying on credit to cover emergencies may only intensify the problem, as you end up paying interest on top of the amount you already lacked in your time of need. Without a cash reserve to fall back on, you could be digging yourself into a bottomless hole, especially if you are only able to make the minimum payment each month. Even worse, if you are unable to make payments at all, you may damage your credit history.

Considering Tapping into Your 401(k)?

Cashing out your retirement savings early is a financial move to avoid, regardless of income, age or financial ability. Plus, your emergency fund should be easy to access and not burdened with penalties and tax implications if withdrawn. The best move is to store your emergency fund in a liquid account such as a savings or money market account so you have immediate access to your funds.

Starting From Scratch?

When paying your bills each month, develop a “pay yourself first” mentality, and remember that a small emergency fund is better than no fund. Figure out the dollar amount you’d like to have after one year and divide by 52. Then, set up weekly automatic transfers of that amount from your checking to your savings. By this time next year, you’ll have met your goal, most likely without even noticing the small, incremental cash transferring each week.

Tempted to Spend?

This separate bucket of money shouldn’t be touched under any circumstances other than a crisis, if possible. If your desire to access your emergency fund is too strong, consider opening a separate savings account from that of your primary checking account—possibly even at a completely separate bank.

An emergency doesn’t have to turn your life upside down. Stay afloat during a crisis by financially preparing for the worst. To find out how to get started with your emergency fund, talk to an advisor at Jemma Financial.

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