How can I set up an emergency fund?

25.JAN.08

ASK CMMB

Question: In these uncertain times I am reminded that my father used to stress the importance of setting up an emergency fund. What guidelines would you suggest for setting up such a personal safety net?{{more}}

Answer: The only way to ensure a personal safety net is to construct a budget and stick to it.

Your monthly fixed expenses like groceries, gas, utilities, etc including loan payments for mortgage and car should not exceed about 60.0% of your monthly disposable income. The other 20.0% should be apportioned towards saving for retirement and if necessary a child’s education.

The purchase of a retirement annuity is advisable since the payments would reduce your taxable income. For your child’s education estimate the cost and how long from now funds would be needed. Then talk to an insurance agent to work out the amount that will be necessary for both plans to grow to the amount required. Then, you can instruct your bankers to set up a standing order, which will pay this amount to the insurance company every month automatically. The other 20.0% of your monthly salary could be put into a fixed income instrument with a floating rate of interest where you can earn a high rate of return but still be able to withdraw the funds at a day’s notice. This would be the emergency fund, which would grow over time. Always keep three times your monthly expenses in this account while the excess can be used as discretionary expenditure i.e. vacation etc.

All information contained in this article has been obtained from sources that CMMB believes to be accurate and reliable. All opinions and estimates constitute the Author’s judgment as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by CMMB in any form whatsoever.

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