Emergencies like loss of job or large medical expanses can have a huge impact on your life and ruin your finances. Some readily available emergency money can provide much needed help when you are faced with a difficult situation.
How much to save
You cannot predict what kind of emergency you will have to face and without knowing this, it is a difficult task to determine just how much money you will need. Experts advise up to 3 to 6 times your monthly income in emergency funds as ideal. The premise is that a worst case scenario emergency would probably arise from of loss of employment or medical treatment. In either case, you will need to make up for your lost earning potential for a few months. With this kind of fund, you can comfortably cover your living expenses while you recover from the emergency.
The very nature of emergencies requires that you should be able to get your hands on the funds in the shortest time possible. Keeping your emergency money in a checking account is a good idea to keep it safe. But even a checking account may not be accessible on bank holidays or weekends. So make sure that your account gives you the ability to withdraw money from an ATM. Local banks or well established nationwide banks are good places for these funds because local vendors or service providers will accept checks from these banks with more confidence.
You can also keep some part of your emergency cash in a place where you or a trusted family member can reach it quickly. For example, you can keep around $1000 in a safe in your home. This will tide over your immediate need for funds until you can arrange for more cash.
Long term emergency fund
Another kind of emergency fund is for huge financial needs that you cannot foresee currently, like avoiding foreclosure. You can maintain this fund as an investment portfolio. With adequately diversified investments, you can ensure that your long term needs and emergencies can be dealt with. This is the only fund which you need to plan with returns and gains in mind. You should remember that your investments may not be easy to convert to cash quickly. The advantage is that you can expect a healthy return from such a fund.