When you think of investments, you probably think of dividends and growth. And yet, while specifically not intended for dividends or growth, an emergency fund is actually one of the most important parts of your portfolio.
No matter how affluent or modest your income, you need a regular stream of income to pay your bills each month. But what happens if that income stream is temporarily stopped due to a layoff, or is suddenly thrown out of whack due to a large, unexpected medical, home or car repair bill? Thatís where the emergency fund comes in.
An emergency fund is a sum of money, equal to at least five months worth of living expenses (eight to nine if youíre self-employed) that you keep in a safe, liquid account, guaranteeing the full amount will be there and easily accessible if and when you need it.
What constitutes a safe, liquid account? Either a savings or checking account covered by deposit insurance, or an insured money market mutual fund. Remember, CDs and individual bonds arenít liquid, and non-money market mutual funds and individual stocks arenít completely safe, so they donít qualify. As for home equity lines of credit, they should not be considered savings or an investment, and therefore should not serve as a substitute for an emergency fund.
Visit our Family Finance pages for more tips, advice and resources to help you manage your money now, and plan for the future.
Rick Shaffer is an attorney, financial writer and host of ďThe Money Show,Ē a call-in radio show.