An emergency fund is one of the most important strategies that any investor needs. As financial guru Dave Ramsey writes in his Seven Baby Steps for Getting Out of Debt, an emergency fund is necessary for “those unexpected events in life that you can’t plan for.”
However well you plan, and even if you are able to record and budget every expense, there will always be unexpected events. That’s the nature of life. Whether it’s sudden and urgent dental work, a household appliance that breaks down, or a stolen bicycle, if you don’t have accessible funds that you can dip into at on a moment’s notice, emergencies can end up costing you dearly. And those are minor emergencies. What happens if you and your spouse lose your jobs at the same time the economy tumbles?
64 strategies to make you rich as a king
Starting an emergency fund is one of the 64 strategies explained in chapter nine of Rich As A King. An emergency fund should have about three-to-nine months’ worth of expenses in it… in cash. This money shouldn’t be invested in anything other than money markets or short-term CDs. When trouble comes, that liquid cash could make the difference between stability and bankruptcy. After all, who wants to pay interest to borrow money, especially when times are tough?
Since many people don’t have three-to-nine months’ worth of expenses to put aside for emergencies, take a Dave Ramsey baby step and start by allotting a certain amount of savings monthly until you build up the fund. Indeed, Dave’s First Baby Step is allocating $1,000 to your emergency fund. Put it into a bank deposit and don’t touch it until an unexpected emergency arises.
Creating an emergency fund means that ‘emergencies’ can no longer derail your financial plan.