Planning for the Unplanned: Establishing an Emergency Fund

Publish Date: October 25, 2012

By: Matthew Wallace

The thing about emergencies is their unpredictability—hence, the term emergency. While their nature and timing cannot be anticipated, emergencies can be planned for in the sense that a young physician, just like any other business person, can and should have a plan in place to cover the financial drain in the event of an urgent situation.

An emergency fund is intended to cover basic living expenses such as rent or a mortgage, food, utilities, and transportation costs in the event one’s primary source of income is interrupted, or a major event occurs. Essentially a safety net, an emergency fund should be enough money to cover living expenses for at least three to six months; for those who really want to err on the side of caution, socking away enough to cover nine to even 18 months isn’t unheard of.

Simple accessibility is a must

An emergency fund is not intended to be an investment vehicle, as the money needs to be protected from loss and accessible without restriction in the event it is needed. Thus, stocks and the volatility that goes with them are not the appropriate place to amass an emergency fund. Rather, utilize a savings account and/or short-term CDs in a lending institution insured by the Federal Deposit Insurance Corporation (FDIC). A combination of the two can be helpful to stretch over long periods of time, with immediate access to money available through a savings account that can tide one over for a period of time until funds locked in a three-month, six-month, or longer-term CD become available without penalty.

Check with the lending institution to find out about withdrawal restrictions in the savings account (they may be limited to a certain number each month), or fees that apply when the account balance dips below a minimum amount. While these accounts may not offer much in terms of interest, the advantage of being able to access the cash with a swipe of an ATM card outweigh the interest-earning options. Seek higher returns through a true long-term investment plan. Conversely, it’s essential to consider this money off-limits for anything but an emergency. Think twice about linking the emergency fund to a primary checking account or debit card to avoid the temptation of using the money to cover expenses that are not true emergencies.

Build bit by bit, automatically

It’s easiest to start an emergency fund by paying yourself first. Set up an automatic transfer that diverts a percentage of each paycheck—say, 10 percent to begin with—to the emergency fund. The fund will grow slowly yet steadily, and before long it’s possible to reach the set goal amount.

Other aspects of planning are just as important

True planning for a financial emergency should include making sure to plan for physicians disability insurance. Such coverage is vital to protecting a young physician’s greatest asset—the ability to earn an income—and fortunately, premium amounts can be tailored in keeping with a young physician’s limited income during his or her early years in practice. Contact a professional insurance agent to learn more about physicians disability coverage.