Life is filled with twists and turns and in most of our daily lives the path is never straight. At times the twists are exciting and present opportunities and at the opposite end of the spectrum unfortunately, like the case of Hurricane Melissa, the twists prove expensive. We are in a mode of change here in Jamaica and most citizens are now showing their resilience and compassion for their brothers and sisters. The tragic aftermath has highlighted how important it is to have an emergency savings plan fund which can help provide a cushion during times of unforeseen expenses.
There is no one-size fits all monetary figure that an individual should aim for in an emergency fund. Like all financial goals this is a personal figure, and an active plan and goal should be put in place to achieve your emergency fund. Focus on smart financial habits and utilize sound investments to establish the fund and you will be well on your way.
The first step is to determine how much you need. To determine this, calculate your monthly expenses. These expenses should be your essential expenses and not include frivolous or luxury needs. Include your basic needs: shelter (rent or mortgage) food (groceries) and then move on to other essential needs healthcare (medication and insurance), transportation costs and loan payments if any. After you have calculated these expenses, decide how many months you would like to cover. If you cannot do months immediately start with weeks. The aim of the exercise is to start.
Once you have determined how much you need to save, the next decision is where to put the funds. While these funds are for emergency purposes you also want to maximize the funds and earn interest in a safe and smart way. Do not leave the funds idle. Separate these funds from high touch point accounts where you may be tempted to access or spend it. If possible, set up a standing order to move money to your emergency fund to ensure it does not get gobbled up in your regular budget.
What are some of the best products you can use for your emergency fund you may wonder? Consider high yield savings accounts, these will give a better interest rate than standard savings accounts. You may also invest in short-term repos. When using repos ensure that the underlying collateral of the repo is investment grade assets. Consider short-term certificates of deposits. CD’s will give higher interest rates than standard savings accounts but bear in mind that your money is locked in for a set period, such as three to six months and so may not be immediately accessible in an emergency.
When building your fund, you should also be careful to avoid certain products or strategies. Do not invest the funds in high-risk or illiquid assets. For example, stocks offer great growth potential for your long-term investment goals but are a risky option for emergency funds as they are subject to market volatility and price fluctuations. Longer-dated securities may also not be the best option especially if they are not tradeable securities. These options may offer higher returns, but their value can drop during market downturns, and they may be easy to liquidate, making it difficult to access your money when you need it most. Make sure you understand exit strategies and early encashment penalties before investing your emergency funds.
Reviewing your finances and making a sound plan will help you when choosing the best place to keep an emergency fund. Speak with your licensed financial advisor to ensure that your savings remain accessible, protected, and steadily growing.
Christine Rankine is Assistant Vice-President -Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm
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