What if your air-conditioner suddenly decided to give up its ghost? Do you resurrect it (replace it with a new functioning unit) using a credit card and then scrimp on your meals for half a year in order to cover the cost of enjoying a cool summer and a warm winter?
Small and big accidents can happen and it helps a lot if you have the cash to insulate you from the worry and stress. Spend the next 60 seconds to learn how to create a short-term bundle of cash effectively.
0:60 Estimate your monthly expenses
The main purpose of having a bank savings is to have the cash to spend for essential needs in the event of unexpected or unfortunate life situations. Ask yourself then how much you would need in case that happens (Heaven forbid). It is as simple as asking yourself how much you spend every month.
You can add up what you spend monthly on your basic needs, such as food, house rental or mortgage payment, transportation cost and other expenses you regularly incur for yourself and your family.
Include an additional amount for unexpected expenses
This could include average surprises such as a broken pipe or substantial ones such as losing a job. Bring your budget up to take care of the usual needs you spend for while looking for a new job. Next, compute the amount you would have to raise during the time you would be unemployed by multiplying the monthly income you lost by the number of months (say, you would be job-hunting for 3 to 5 months). In addition, you can integrate whatever available cash sources you may have and other expenses to cover the needs of people who depend on you financially.
There you go. That rounds up the figure you have to save as an emergency savings account.
It is time to see into your future expenses, from 1 to 5 years
Having accomplished the first step, think of other cash needs you have in mind. Does your fence need repainting? Do the children need dental check-ups? Your family has always wanted to go to Hawaii?
Such plans should find a place in your short-term savings account. Sit down and crank up the figures to derive an amount for the next few years.
Think about how fast you will achieve this objective
You need to raise the amount in the least possible time because emergency expenses are like thieves that strike when you least expect them. Determine how much you can comfortably spare monthly to that pot. You cannot afford to avoid this call; so for your own good, take it. Your survival rests on its being there to turn to. Having done that, you can then estimate your non-emergency short-term savings.
Decide where to put your stash
Consider how you can get your hands readily on the money you have kept away for any eventuality. No sense preparing for an emergency without the hardware being there when you need it. Hence, you must choose a secure place for your money – that is, it must not be an investment which is as fickle as the weather in Seattle. Here are the possible choices:
- Money market mutual funds
- High-yielding savings accounts
- Money market accounts
For savings intended for expenses that we refer to as non-emergency (those which you really wish you could spend on a whim), liquid investments can provide a better return on your money. These include certificates of deposit.
Compare the various types of investments online
You can check out bank adverts in the media, compare national rates on Bankrate.com, find out how much your broker pays on cash in your brokerage account, know more about money market funds and ask your credit card union and your bank what they offer. Investigate the following:
- What are the relative returns for equal time frames?
- What are the prevailing interest rates?
- Over what time frame do these rates apply?
- What are the fees for buying and holding the investment?
- What is the smallest investment allowed for attractive interest rates?
(Be careful of some institutions which attract investors with high rates only to get your attention but bring them down once you negotiate. Look over the actual rates in the past at Bankrate.com to check how the interest rates change over time.)
Work the plan!
Time is running short, if you have not noticed by now. You need to have a short-term emergency savings today, not tomorrow! Do not wait until you find yourself paying an onerous credit-card debt incurred because your smartphone broke, the plumbing leaked, the wife got sick or the winds blew away your roof.
Bonus tip: Force your savings!
In case it is not your habit to save, you need not worry as an automatic salary-deduction or transfer can help you move in right away. Talk to your employer if the company can split your paycheck (direct deposit) into your regular account and your short-term savings account. Or you can have an auto-transfer from your checking account into your emergency account.
There is more, if you still have time.
Some valuable links for you – click away:
- Where to keep your cash
- Steps to take to build a cash-stash
- Safeguard your finances for your peace of mind
- Easy computations for figuring out a rainy-day savings
- Where to find a high-yield account for your short-term savings (Our Banking collection can help you today)