by banknotelover

Created on: May 04, 2009

I believe everyone, of any age, should have an emergency fund, especially employees. This is because if you get retrenched, you would then have some money to survive on when you get retrenched. I would recommend that your emergency fund be the equivalent of three to twelve months of your pay. This may seem like a tall order, especially to those who have no savings and spend every penny of your salary, but this is necessary. You will not regret saving up a percentage of your salary every month and having an emergency fund when you get retrenched (Lord forbid, though!).

An emergency fund can be created simply by saving up a percentage of your salary every month. That is the easiest method to get an emergency fund. If your salary is $10,000, and you save 10% of your salary every month ($1,000), and you want to have an emergency fund equivalent to six months of your salary ($60,000), you will need to save up for 60 months (5 years). That, actually, is a very long time. What can you do to create your emergency fund in a shorter time, though, is to invest the money. If you are a low-risk investor, what you can do is that after you have saved for a couple of months, you can place your money in a time deposit, which earns you higher interest. You can also buy Treasury bills, which are sold in terms ranging in 28 days, 91 days, 182 days, and 364 days. I recommend Treasury bills because they are liquid, and if you get retrenched, you can get the cash out quickly. I do not recommend other types of Treasury securities (Treasury notes or Treasury bonds) for storing your emergency funds because these mature in 2 to 30 years, which is not liquid and you cannot access your funds easily if you get retrenched.

Treasury bills are typically sold at a discount from the par amount (also called face value). For instance, you might pay $990 for a $1,000 bill. When the bill matures, you would be paid $1,000. The difference between the purchase price and face value is interest. It is possible for a bill auction to result in a price equal to par, which means that Treasury will issue and redeem the securities at par value. The interest that you earn buying bill after bill would add to your emergency fund and that would enable you to build up your emergency fund more quickly.

If you would like your fund to grow more quickly, invest in stocks. I cannot give comprehensive advice here, but I would recommend reading the Rich Dad Poor Dad series for more information. Investing in stocks would enable your emergency fund to grow even more quickly than buying Treasury bills. This is slightly riskier than buying Treasury bills and saving it in time deposits, but it grows your fund more quickly. It is entirely up to you.

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