Murphy's law dictates that if anything can go wrong it will. In my short time here on earth I would have to say that Murphy was a pretty smart guy. One of the first steps of financial management is starting a emergency savings account . Experts say that a minimum 3-6 months of basic living expenses is needed to cover the unexpected. Maintaining a Rainy Day Fund is important for many reasons, but to keep this short I will cover the three goals of a rainy day fund.
- Staying Liquid- By definition an emergency is something unexpected so keep your money easy to reach. Certificates of Deposit, and other like investments are inappropriate due to the fact that there will be fees, and penalties if the cash is needed. Your cash needs to be completely liquid. A high yield savings account, or high yield money market account are prime parking spots for your cash.
- Beating inflation- Inflation is a virus to your cash. It will slowly eat up all of your purchasing power. There is nothing worse than your hard earned money being close to worthless when you need it. When holding cash for emergencies, use a high yield savings, or money market account the average rate for a high yield savings account right now is about 4.25% APY, and the average rate of inflation is about 3%. So just by finding the prime place to stash your cash you can keep the power of your dollar.
- Stay out of debt- Debt is a scourge, debt and reckless spending are the two main enemies of financial freedom. Having an emergency savings account means that you do not have to feed the beast by using a credit card for those unexpected circumstances. Credit Cards are a last option, not a first resort.
Having an emergency savings account is one of the first, and most important steps in your quest for financial freedom. If you are having a hard time saving just think small. A little bit every month adds up to big savings.