Emergency Funds

An emergency fund is needed to meet unexpected expenses that are not planned for in the family budget. This could be a short-term illness causing a loss of income, medical expenses, and property losses that are not covered by insurance. An emergency fund could also serve as a financial cushion against such personal problems as prolonged unemployment or some other financial crisis.

The need for an emergency unemployment fund has received greater attention within the last few years. Many capable persons have lost their jobs because of economic dislocations or plant closings. A reasonable emergency fund can help to prevent a temporary unemployment from becoming a crisis. The fund will give the family time to adjust without having to drastically change its living standards or disturb other investments.

The size of the needed emergency fund varies greatly. It depends upon such factors as family income, number of income earners, stability of employment, assets and debts. Size of insurance deductibles, health and property insurance exposures and the family’s general attitudes toward risk and security are also important. The size of the emergency fund can be expressed as to so many months of family income. As a guideline, it is advisable to reserve a minimum of two and a maximum of six month’s income.

By its very nature, the emergency fund should be invested conservatively. There should be almost complete security of principal, marketability and liquidity. Within these investment constraints, the fund should be invested so as to secure a reasonable yield, given the primary investment objective of safety of principal. Logical investment outlets for the emergency fund would include bank and credit union savings accounts, money market accounts, and life insurance cash values.

The careful person may also want to have some ready cash available for emergencies, even if it is non-interest earning. Such an individual might consider setting $200 in cash at home to be used only in case of dire emergency.