So this pay period looks to be a great windfall. You’ll have that extra bit to sock away for a rainy day. When we ask people what they plan to do with the extra money, many of them tell us that they plan to invest it toward their retirement.
Seeking out investments to build personal wealth and to have a nest egg for retirement is a great idea that more people need to do during their early working life. Unfortunately, when we ask people how much of an emergency fund they have available, many will shake their heads. They may not have any emergency funds set aside or they hope they have enough in their checking account to cover the unexpected expenses.
Emergency Funds Come First
Very rarely will you go through your life without experiencing an emergency. You might have to deal with something mundane, such as your car breaking down on your way to work, or something more serious such as a medical emergency, house fire or death in the family. Whatever the problem is, you need immediate access to your money to pay bills, make repairs, or use the funds toward other expenses.
It is always important to save money, whether you are investing it or placing it into an emergency fund. Yet consider placing money into an emergency fund first so you have a financial cushion available to handle any unexpected expenses.
Once you have your emergency fund built up, then you can use the extra money toward investment mediums.
Tax Penalties for Early Investment Withdrawals
You may be asking, “Well, if the money goes toward investments, it will build interest. Then I’ll have even more money for any emergency that happens.” While you could use the money that is placed into investment vehicles as a safety net for emergencies, gaining access to these funds is not always easy.
First, you will have to sell the shares to get the money. Unfortunately, depending on the fluctuating market, you may not be getting back as much as expected or what you originally paid for toward the investments.
Second, depending upon the type of investment accounts you have you may face restrictions on early withdrawals. In addition, withdrawing certain investment accounts early (i.e. some IRAs and 401(k)s) may generate unnecessary taxes and financial penalties.
6 Months’ Worth of Emergency Funds
Now that you understand the importance of saving money for emergencies, you may be wondering how much to place away for a rainy day. It is ideal that you save, at least, enough money that will cover three to six months’ worth of your current living expenses.
While this may seem like a lot of money, be aware that you may experience an emergency that may create reoccurring expenses for several months, such as medical bills. Also, if you lose your job, you’ll have enough money to keep your home and pay for daily living expenses while looking for a new job.
It is also advisable to place the money somewhere where you won’t end up using it for daily expenses or buying luxury items. Consider having a separate account at the credit union so you won’t be tempted to use the emergency funds for something that is not an actual emergency.
We’re Here to Help!
If you have questions on savings and investments or need guidance on getting the most out of your accounts, stop by or give us a call at 800.782.4899.
Each individual’s financial situation is unique and readers are encouraged to contact the Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.