Let’s say you’ve paid off your credit card balances. Your next priority should be to establish an emergency fund for yourself and your family. Many people end up in financial trouble simply because they lacked the funds to cover unexpected expenses. With adequate emergency funds, you can avoid new credit card debt or, even worse, the endless spiral of debt that can come with payday or title loans. Even if you never need to use the money in an emergency fund, you can enjoy the peace of mind of knowing it’s there.
Emergency Fund Options – Money in an emergency fund should be both safe and accessible. Money in a checking account may be safe, but it also may be too easily accessed. A better alternative is a savings account. By keeping your emergency fund separate from the rest of your money, you’ll be less likely to spend it. Also, with a savings account you’ll be earning interest on your money.
Another option is to keep money set aside in a CD, or more precisely, a series of CDs (known as CD laddering, when a CD reaches maturity, you simply roll it over into a new CD). CDs offer the advantage of higher returns than a savings account. Although there is a penalty for early withdrawal in the case of an emergency, it may be more than offset by higher overall returns. Since Community Bank CDs require a minimum investment of $1000, you probably will need to start with a savings account and move your money to a CD later on.
How Much is Enough? – Obviously, the more you can put aside as a financial cushion, the greater the range of contingencies you’ll be prepared to deal with. However, even as little as $500 can help cover many unexpected expenses, such as car repairs or emergency travel, and keep you from going into debt. Even if your initial contributions are modest, you can create a financial cushion for yourself through steady effort. Just keep at it.
Operated by Bank of America, N.A. Member FDIC. Equal Credit Opportunity
© 2010 Bank of America Corporation. All rights reserved.