Ah yes, if it can go wrong, it will. Does this sound familiar? Many of us have seen Murphy and are not too fond of him, so let's kick Murphy out. Let's establish an emergency fund!
A good, old-fashioned Grandma's rainy day fund will keep you from going into debt when life hits you. Money Magazine says that 78% of Americans will have a major negative event in any given 10-year period. One is headed your way, so be ready for it. The reason you have the emergency fund is to prepare for the unexpected. When the unexpected happens, you will sleep more soundly at night and not sweat it during the day. Why? Because you will be ready.
The emergency fund is designed to cover expenses, not replace income. If you are laid off from your job, you need to cut your lifestyle until you find work again. This can actually make your emergency fund dollars go farther, since you won't be spending money on luxuries while your cash flow is less.
It is crucial that you keep your emergency fund liquid (fairly easy to access). If you go outside and it starts to rain, you won't keep your umbrella locked in a safe in the trunk of your car, so why would you keep your emergency fund in a place where it is a hassle to get to when disaster strikes?
You should shop around for the best interest rate so that you earn a little something on it, but don't put your money into a complicated investment where it will be difficult to get it out. Put your money into a money market fund with a good interest rate (again, one that is easy to get to when Murphy visits) and has check-writing privileges.
Something fun about an emergency fund is that not only is it Murphy repellant, but it's a simple way to see how compounding interest works. As it earns interest, it grows more.
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