HomeUnexpected expenses sneak up on the best of us. Paying these unexpected expenses looks impossible when you are in debt and barely making the payments from month to month. If you're like most, you have to reach for the credit card and then find yourself deeper in debt and farther behind.
What do you do about this?
The answer for paying unexpected expenses is an emergency savings account.
An emergency savings account is a sum of money set aside in an account that is only used for paying any unexpected expenses.
Unexpected expenses come in many varieties and range from a roof leak to a job layoff.
There is no hard and fast rule to determine how much you need in an emergency savings account, only rules of thumb.
If you are still paying off your unsecured debts it is generally accepted that $1,000 is an appropriate amount until you have become "bad debt" free.
If you have nothing more than a mortgage payment or perhaps are completely debt free the common recommendation is that you have 3 to 6 months living expenses put aside. Now this is where it gets tricky. Everyone will have different requirements for 3 to 6 months living expenses. The general rule of thumb is to have at least $10,000 available.
This is just a rule of thumb and you will have to do some thinking for yourself here. If your mortgage payment is $2,000 each month, then $10,000 surely will not cut it. On the other hand, if you are debt free, $10,000 may be a nice cushion. Once you are living on a monthly budget it will be easy to determine how much you will need for your emergency fund. Make sure that you do not skimp on this account.
Your emergency savings needs to be readily available; money market accounts are usually the best choice.
Unfortunately money market accounts and other short-term savings vehicles are not big moneymakers, but you can access your money quickly and do not have the threat that it will decrease in value.
The reason that I like money market funds is that they will make a return comparative to other accessible investments, most have check writing capabilities, and your investment is safe from downturns in the stock market.
There are other options such as interest bearing checking accounts, savings accounts and possibly other savings vehicles in various banks, investment institutions and credit unions. Choose the investment that is available to you and fits the criteria.
One thing to be aware of when choosing a money market or any investment option is the expenses. Expenses will vary widely among investment firms. Ideally you want to find an account that lets you invest in the money market with no up front or back end fees and minimal yearly expenses. Since a money market does not appreciate quickly it would take a long time to make up for high expenses.
An up front fee is a percentage of your money that you have to pay when you initially invest it. For example if you invest $1,000 and the fee is 5%, they will take $50.00 out of your account and you will only end up with $950 invested.
With a back end fee they take a percentage when you withdraw your money.
All investment firms will charge an annual expense on your invested money. Just pay attention and choose one that has a low expense. Be careful, since some will lure you in with a low initial expense that will be raised after a specified number of months. Look at the track record going back a few years to make sure that the expense ratio has stayed consistent.
Make sure that you have an emergency savings account so that paying unexpected expenses does not chase you back in debt; it is a vital step in living without debt.
About the author: John Cook is the author of Finance For Families.com, a website designed to assist families in making smart financial decisions. The burden of seemingly insurmountable debt is destroying too many families. You can read more at http://www.financeforfamilies.com.