Emergency Cash
In a perfect world all of us would be homeowners and in great financial shape. One way to tell (great financial shape) is existence of Emergency Cash, and about six months of funds is what most experts recommend. For homeowners it is more important than ever to have an established emergency cash reserve. It would be used to cover basic living expenses.
This funding would cover emergencies from natural disasters, unexpected home repairs, accidents, medical bills and unemployment. How much is needed? The emergency cash reserve should be enough to cover the following for up to six months:
Mortgage Payments
Groceries
Loan Payments
Car Payments
Utilities
Minimum Payments on Credit Cards
Insurance Costs
What is the source of the Emergency Cash Reserve? Some type of savings or very liquid investment is needed.
Investing Your Emergency Cash Reserve
Safety, not return should be the primary investment objective of your emergency cash reserve. The simplest and most liquid option is to put the funds into a savings account or better yet, a money market account.
Building a Six-Month Cash Reserve
Assume the funds needed for your six month period is (simple math) $12,000. It could be funded with six certificates of deposits as follows:
$2,000 30 day (1 month) maturity
$2,000 60 day (2 month) maturity
$2,000 90 day (3 month) maturity
$2,000 120 day (4 month) maturity
$2,000 150 day (5 month) maturity
$2,000 180 day (6 month) maturity
As each certificate of deposit matures, roll it over into a new six-month CD. In short order, you will own six separate six-month CD's, one of which will mature every month. This technique allows you to lock-in the higher interest rate given to longer maturities.
Real World Emergency Cash Reserve Ideas
For many folks and those just getting started, funding emergency cash needs may mean other funding methods to cover that proverbial "rainy day."
Funding can be more short term and a little more messy. It could mean that emergency arrives with only some savings, fewer than six saving certificates and open funds on credit cards. While we may argue against using credit cards to fund normal daily expenses, if necessary they must be used.
Depending on the nature and length of the emergency and the dollars available it may mean borrowing from a different source of funds either from a local or online source. Try to find the best terms (rates) available and pay off the source as soon as possible. As the crisis passes go back to working toward the long-term financial goals.
One of the most overlooked (and most difficult to accept) is using the family and friends source to help you through a rough spot. Present the need is a straightforward and open manner. Make sure a solid and doable payback plan is put in place and followed to the letter.
While "Cash / Title / PayDay" loan sources are the very most expensive alternatives going, a source is needed to fit the Cash Emergency and credit history facing the individual. The key is to return to the budget plan that leads to a solid financial future as soon as possible.
