Impending Financial Safety: Accumulating Emergency Funds
In a recent discussion, Taylor Whelan, Chief Investment Officer at Whelan Financial, emphasized the importance of considering inflation when saving for a rainy day. Whelan recommended having three to six months' worth of savings in a liquid investment to protect against inflation eating away at emergency funds if they are kept in cash for extended periods.
According to a study conducted by Credit One Bank, roughly half of people (51%) would use a credit card for a $500 emergency, while 38% would do the same for a $1,000 emergency. This highlights the significance of having readily accessible savings for unexpected expenses.
The Credit One Bank study, which is available for viewing online, does not specify the type of liquid investment that Whelan recommends for emergency funds. However, it is important to note that the recommended liquid investment can yield returns, providing a small income to your savings over time.
Samuel Molina, founder of The Academy of Financial Education, concurs with Whelan's advice. Molina suggests saving as little as $5 to $10 to start forming the habit, and recommends having savings that can cover three to nine months to prepare for long-term setbacks, such as job loss. Molina also emphasizes the importance of having savings for long-term financial security.
Financial experts also advise saving money even when paying down debts. While it may seem counterintuitive, having an emergency fund can prevent you from accumulating more debt in the event of an unexpected expense.
Whelan does not advise keeping emergency funds in cash under the bed. Instead, he suggests considering a liquid investment for long-term emergency funds. This approach allows your savings to grow while still being easily accessible in case of an emergency.
In conclusion, financial experts stress the importance of having savings in a liquid investment for emergency situations. Whether you're starting small or aiming for six months' worth of savings, every little bit helps in preparing for the unexpected.
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