Cuapa Asset Management

People often invest with the idea that their money will be put away for retirement, or education, or buying a house or some other goal for the future. What many forget to do is set some of their money aside as savings for building an emergency fund.

Emergency funds are funds which are set aside by a saver for, as the name suggests, emergencies. They are designed to cover unforeseen expenses which may occur in the future and which someone has not planned for covering.

There are many situations when an emergency fund might be necessary for someone. Sudden medical catastrophes, natural disasters, legal actions, or unanticipated needs to travel, can all have a serious impact on someone’s finances. Most people who do not have an emergency fund already set aside for cases like these need to take out new mortgages with high interest rates, or dig into their retirement or other savings funds—something that nobody should ever do.

The solution is saving for an emergency fund. This offers several benefits to the saver, including:

-Peace of mind in day-to-day life. You never have to worry about the “what-ifs” if you have an emergency fund, because you will already be prepared for them.

-Money for emergencies. You won’t need to deplete your retirement fund or other investments in case of an emergency, and in case you don’t even have those funds, you won’t be completely out of luck and unable to help yourself.

-Interest-gathering investing. Waiting for an emergency to happen and then taking out a mortgage or other loan causes you to have to pay back interest on the initial loan. On the other hand, if you have an emergency fund set up, your money gains interest over time up to the point that an emergency occurs that necessitates using the fund. If such an emergency never occurs, not only did you prevent needing a high cost loan in the future, but you actually added to your retirement savings.

So how do you invest in an emergency fund?

First, you need to make sure that you buy a stable investment. Stocks may be appropriate for long term investing like that which occurs in retirement planning, but you never know how soon an emergency might occur so an emergency fund should not consist of investments which fluctuate greatly in price. A combination of a savings account, bonds, precious metals, and Certificates of Deposit are all ideal for putting into an emergency fund.

Second, consider purchasing insurance. There is insurance available for personal liability, major medical catastrophe, unemployment, and so on. These can add to your payable funds in the case of an emergency.

Third, ensure that you can readily liquidate whichever investments you purchase. If you purchase bonds, for example, they may be stable but some smaller government-issued bonds like those available from Canada and Israel can only be cashed out at certain times and are non-transferable. These are not ideal for emergencies.