How to Improve Your Investment Performance With an Emergency Fund

Daniel Penzing
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An Emergency Fund Allows For Higher Payoff

What typically happens with persons who are investing in a home is that they sign an agreement on the amount they will pay each month in addition to the amount that the bank pays towards the mortgage.

This is fine without an emergency fund because the banks are always willing to work with the client to help them out. But when the client has an emergency fund, the client is in control of how much they will pay each month towards the mortgage. This also puts the client in control of the type of mortgage that they will choose.

The bank will most likely advise the client to choose a conventional mortgage instead of an FHA mortgage. The reason for this is that the conventional mortgage, which also lets the bank lend interest that can be a bit higher, will be cheaper for the client.

Clients with emergency funds have the opportunity to make decisions for their own benefit and choose a different type of mortgage over another. This will allow the client to choose a mortgage rate that is lower than the bank can offer.

An Emergency Fund Prevents Premature Selling of Assets

You should never let a stock or investment slide for very long. If the value drops below your purchase price, sells it. Your first thought might be, “I’ll wait for it to go back up.” Don’t fall prey to this common mistake.

There’s a good chance you may be waiting around for a loss to turn into a profit for a very long time.

This is a common error made by many investors. Those that do finally cash in sell at a loss.

The time to sell is when you have a loss, not a gain. It’s all too easy to hold on to a stock or investment you like and think it will come back to what you paid for it. But when do you sell? If you’re waiting for it to go back up, you could be waiting for years.

This means you’ll never get back to even, and will end up selling at a loss.

An Emergency Fund Offers Intangible Benefits

An emergency fund provides an invaluable safety-net in case an unexpected financial emergency should occur. To effectively manage your money and safeguard your family from financial ruin, there’s no better investment you can make then building a high-yield emergency fund.

As they say, “Nothing says I love you quite like something you can hold in your hand,” especially if that something is money. A high-yield emergency fund can be accessed quickly and used to meet any unexpected expenditure. Having a fund in place when you need it most might be the difference between losing or maintaining your family’s standard of living.

That’s not a benefit that can be given a precise dollar value … until you realize how your emergency fund can buffer your finances.

Is your job in jeopardy? With a fully-funded emergency fund, you’ll sleep easier, knowing that, if you’re laid off, you’ll have enough money to tide you over until you’re able to land another job.

How Much Money Should Be In Your Emergency Fund?

You should have an emergency fund, which is designed to help you maintain the standard of living you have (or want) in times of emergency. How much money you should put in your emergency fund is up to you but I recommend putting aside at least three to six months worth of your income.

You could also decide to put aside one to three months worth of your income for an emergency fund and then putting a small percentage of any extra income you get each year into that fund.

However much money you decide on, it is important to put it aside and not touch it. This is a key concept so make sure you understand it. It’s called an emergency fund because it’s something you access only in a true emergency, not because you’re bored and want to go on vacation.

How to Quickly Build Up an Emergency Fund

An emergency fund should be a fundamental building block of your investment strategy. Its job is to help protect your financial stability. So how do you achieve it, and how can it be achieved quickly?

The best way to build up your emergency fund is to create a separate account that’s dedicated to it. This will allow you to keep track of how much you’ve saved and will help you to focus your finances on building up the emergency account. It’s important to have a dedicated account that’s separate from savings and investment accounts because you need to keep the money completely separate. It’s tempting to tap into this funding in the event of an emergency, but you need to avoid using your hard-earned investment capital. It’s not easy, but if you can do it, you’ll be able to build up your emergency fund quickly.

Some people also choose to open a savings account that’s specifically designed for savings goals. These accounts often offer higher interest rates. If you’re struggling to reach a specific savings goal, you can also bank on the bonuses that these accounts come with. So for example, you could choose to put a portion of your emergency fund in a savings goal account and a portion in an actual emergency fund.