Contingency Funds for Emergencies: Here’s How to Build Yours
People talk a lot about saving money for a rainy day, but contingency funds for emergencies take this concept one step further. You’re not stashing cash away so you can buy something nice while you wait for the storm to pass—you’re saving to ensure that you can repair your house if the storm destroys it. Here’s why a fund like this is so important, and how to start your own.
You might think you have your financial affairs perfectly in order if you spend 50% of your after-tax income on essential living costs, 30% on discretionary spending, and 20% on long-term investments. But what happens when your car breaks and you need to buy a new one? If you only have a few hundred dollars of cash, you’ll be forced to liquidate your investments—even if it means taking a loss. But this could all have been avoided if you’d put aside some contingency funds instead.
COVID-19 has changed our spending habits and taught us just how uncertain the world is, so no sane person should overlook the importance of having money set aside for emergencies. Not sure where to start? Here are some strategies that can turn this general objective into something more concrete.
What is a contingency fund for emergencies?
Also known as an emergency fund, a contingency fund for emergencies is a stash of money you save up to get you through any unforeseen events that result in costs. It’s the antithesis of living paycheck to paycheck or investing every last penny you have.
A contingency fund can cover events like:
- Repairs or replacements for your phone, car, computer, and other devices
- Unpaid time off work due to illness
- Covering living costs after suffering a layoff
- Emergencies when traveling, like canceled flights or lost luggage
- Healthcare costs
The pandemic has shown us that even people who do everything right and have seemingly secure jobs (e.g., airline pilots) can lose all they have at the drop of a hat. Nobody is exempt from needing an emergency fund, and without one, you may be forced to resort to personal loans or credit card debt instead. Why accept extortionate interest rates when you could have saved the money in advance?
Also, bear in mind that even when costs should be covered by insurance—such as in the case of travel emergencies—you’ll usually have to foot the bill yourself upfront before the insurance company reimburses you.
How much money does a contingency fund need?
The size of your contingency fund will depend on your circumstances. As a rule of thumb, it’s a good idea to keep at least six months of living expenses in your fund, with the idea being that you’d be able to cover your costs for long enough to find a new job. For most people, this sum of money would also be enough to cover other expenses, like buying a new computer.
Clearly, the sole breadwinner for a family of four with a mortgage would need a much larger fund than a single person with minimal responsibilities.
But your living circumstances and your dependents aren’t the only considerations—your profession or income source is another big factor. Some people might want to keep even more than six months of expenses; for instance, business owners or anyone who tends to have a fluctuating salary.
Others might feel secure enough to keep a fund that covers as little as three months, but we don’t recommend it. As we’ve said already, no career path will make you 100% financially secure.
How to start creating contingency funds for emergencies
To start building your fund, all you have to do is save money—but this can be harder than it sounds.
The psychology of money is strange, and our mind can come up with all kinds of excuses about why we don’t need a contingency fund. It’s emotionally challenging to put your money into a fund where it’s just going to remain dormant until something goes wrong. We’d much rather spend it on an exciting new gadget or invest it in a hot new stock with the promise of earning you high returns.
Plus, if you’re starting from nothing and your living costs are significant, starting a contingency funds for emergencies can seem incredibly daunting. For instance, if you’re spending $2,000 a month on basic expenses like rent and transport and you want to be able to cover six months of expenses, that’s a whopping $12,000 to stash away. That could take more than a year, depending on your income and circumstances.
For this reason, some people get tempted to only save a small amount each month toward their emergency fund while simultaneously using their money for other investments or purchases. But preparing for disaster should always be your top priority.
We recommend avoiding risky investments (except for your pension) while you’re still saving your emergency fund, and you can also help the process along by using your tax refund.
Where to save your contingency fund
When deciding where to store your contingency funds for emergencies, there are three primary criteria: you should be able to instantly access it, your funds shouldn’t be at risk, and it should be separate from your cash for discretionary spending.
Basically, don’t put the money in your main checking account, but don’t put it all in Tesla stocks either.
For most people, a high-yield savings account is the most sensible choice, as long as it allows for instant withdrawals at any time. This way, you’ll face zero risk and may be able to make some interest from your savings, even if it doesn’t make you rich.
But this isn’t the only option. There are a few low-risk investment options that also allow for instant withdrawals while making you better returns than your standard high-yield account. Want to know more? Just keep reading.
Consider investing with MyConstant
At MyConstant, we offer a few low-risk ways to invest your US dollars or cryptocurrencies while earning decent returns—and you can liquidate your investment whenever you want, making it perfect for an emergency fund. For instance, you can deposit USD with us and earn 4% APY without committing to a fixed term.
But if you decide you’d rather keep your emergency fund somewhere more traditional, that’s okay too. Maybe you’ll come back to us once you have your fund sorted and you’re ready for higher-risk and high-return investments. For instance, you can earn interest on your cryptocurrencies by lending them out to borrowers through our platform and earn up to 7%.
Either way, benefits of investing with us include:
- Interest compounded and paid every second
- No fees
- Anytime withdrawals
- Minimum investment just $10
- No maximum investment limit
Sound interesting? Sign up for a free account today and start investing.
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