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Creating a family emergency fund is a vital part of an investment program. An emergency fund can provide much needed money in a family crisis. Many financial professionals indicate a family should stash away at least six months of income into an emergency fund. However, three to four months of income is more realistic for families with a steady income.
However, what would happen if an emergency occurs before this account is completely funded. Below are five suggestions how to obtain funds in a relatively short amount of time:
PLACE OVERDRAFT PROTECTION ON YOUR CHECKING ACCOUNT
Overdraft protection prevents a check from being returned "NSF" (non-sufficient funds). Overdraft protection is a loan made by the bank to you should you accidentally write a check greater than what is in your checking account. The overdraft loan from the bank is paid back in monthly installments.
OPEN A LINE OF CREDIT
A line of credit, also known as a signature loan, is an unsecured loan that has already been approved by the bank. In time of an emergency you would need to visit the bank and sign the paperwork to obtain the cash.
USE SECURED LOANS
A secured loan is a loan secured by another asset. For example, if you have a $1,000 6 month certificate of deposit (CD), you could obtain a loan for approximately $1,000 by using your CD as collateral.
IF YOU ARE A HOMEOWNER, CONSIDER OBTAINING A HOME EQUITY LOAN THAT OFFERS CHECKING WRITING
You need to fill out all of home equity paperwork with the bank or mortgage company. Once everything is complete, the bank should give you a checkbook instead of a lump sum for your refinance proceeds. By having check writing privileges, you can write checks for any amount up to the pre-determined limit. This is a great way to have funds available for an emergency. The interest for this type of loan may also be tax deductible. Check with your tax advisor to determine if this type of interest is tax deductible for you.
CREDIT CARD CASH ADVANCES
Use this option as a last resort.
Hopefully, you will never need to tap into your emergency fund. However, should you need to replace the engine in your car or supplement your income due to loss of a job before your emergency account is fully funded, you now have several possible options to chose from. Good luck in your future.
This emergency fund strategy was taken from Andrew LaPointe's Book: How to Survive the Retirement Crisis of the 21st Century - What to do Now!
One of the best ways to calculate the appropriate size of an emergency fund is review your budget. This will indicate how much liquid capital you may need to supplement your lifestyle in time of need. If you currently don't have an emergency fund in place, the simpliest way to get one started is add the heading of Emergency Fund to your budget. This new account should be funded on a monthly basis. Once you have three to six months of income in this account your emergency fund is in place.
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