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You’re probably familiar with emergency funds, crucial for tackling unexpected financial troubles. When it comes to larger-scale financial crises, Financial Samurai recommends setting up what he terms the 'Armageddon Fund.'
Experts typically advise saving enough to cover 3 to 6 months of basic living expenses in your emergency fund. This fund should be highly liquid, meaning it’s easily accessible whenever needed, and that usually means putting it into a standard savings account where interest is practically nonexistent, often around .01%. The key takeaway: you want enough cash on hand for emergencies but avoid locking away too much that you miss out on potential returns.
Here’s the advice from Sam at Financial Samurai:
If you lose your job, your business folds, and all other sources of income dry up, you’ll be in deep trouble unless your Armageddon Fund is large enough to support you through tough times until things recover... Think of the Armageddon Fund as the ultimate backup for all your emergency funds.
Sam’s approach? Invest in CDs. This way, you can earn at least some interest on your savings, and if you find yourself out of work, you can tap into the liquid cash from your emergency fund, ideally until your CD matures. Then, you can start using the money from your 'Armageddon Fund.' We've also recommended something similar with a CD ladder:
A CD ladder involves taking a portion of your savings and purchasing a series of Certificates of Deposit that mature at different intervals, like 3 months, 6 months, 9 months, and 12 months. As each CD matures, you reinvest that money into a new ladder. This strategy boosts your return by 50-100% compared to keeping it in a savings account, and the penalty for early withdrawal is limited to the interest earned, meaning you won’t lose any of your principal if you need to cash out early.
Ultimately, the goal is to set aside funds for larger emergencies without letting your cash sit in a no-interest savings account where inflation erodes its value. While this level of saving might not be achievable for everyone (some struggle just to save for smaller emergencies), it's a solid financial goal to aim for.
For further details, visit the full post at the link below.
Photo by Tim Dorr.
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