Emergency Funds

At Champion Wealth Management we recommend setting up an emergency fund to prepare for life’s unexpected twists and turns. An emergency fund is simply an account with enough money in it to cover six to twelve months worth of expenses. This account gives you an alternative to tapping into long term investments which typically give you the highest return potential or taking out high interest rate loans which could cause you to slip further into debt.

A practical way of looking at the use for this account would be to consider how long you would need to pay monthly expenses while you looked for another job. Remember, the more you earn the longer it will take to find the job that meets your financial obligations, and the larger your emergency fund will need to be.

Creating a budget will help you determine how much you can save each month by uncovering non-essential spending. A few simple steps such as cooking your meals at home or brewing your coffee in your kitchen can add up to big bucks being stock piled in your emergency fund.

If the amount of money you need to add to your emergency fund is overwhelming start by saving for the first three months of expenses. Don’t stop adding to your emergency fund until your goal is met. Having a reliable source of funds to fall back on is essential to your overall financial health.

Investing Emergency Funds

The first three months worth of emergency funds should be held in an account that is highly liquid. Automatic contributions can be added to the account to insure the account is properly funded for a full six to twelve months worth of expenses. Certificates of deposit are another investment option but do have withdrawal limitations making them not highly liquid. The interest earned by liquid accounts such as savings, money markets, or Certificates of Deposit are generally low. because there is not a lot of risk associated with these types of investments.

After six months of expenses are covered by the emergency fund short term bond investments can be used to earn more interest. The money used to purchase short term bond investments should not be needed for any immediate purpose because these investments are more volatile and selling them too soon could result in a loss. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.