Emergency Funds
October 30th, 2006 by digerati
Everyone should have an emergency fund. Here’s some reasons:
- Family death you need a plane ticket for
- Job loss
- Health issue, hospitalization, etc
- Car accident, need to take time off to get fixed or worse
- Unexpected problems with children
- etc, I could go on for a long time
Basically unexpected things happen. They happen every day, but sometimes those things happen to us, and sometimes those things cause a financial hole we didn’t expect. So what to do? Well for starters, have an emergency fund!
What is an emergency fund?
This is a place you put money where it is very liquid and safe. The account is not used for any other purpose unless it is necessary and unexpected. I’d recommend a high yield savings account, credit union, or money market account.
How much should be in the fund?
Exactly Three hunred forty….hmm, actually you need to base the amount on your own lifestyle. Here’s how: add up all your expenses for a certain amount of time. I recommend at least 3 months, 6 is better, and 12 is ideal. The amount of expenses over that time period is the amount you should have in your emergency fund.
Here’s why: your emergency may last several months. Let’s say you lose your job and have difficulty finding another one. Even if you don’t have difficulty, you may need two months worth of money on hand to maintain your current lifestyle before your new pay kicks in. That’s the key. You want to add up all your expenses because the goal is to be able to maintain your current lifestyle for a period of time with no incoming money. That amount also will generally cover any unexpected car repairs or flights, or even medical expenses.
Disclaimer: I’m not saying that if you lose your job you should maintain your current lifestyle. I’d hope you’d scale back where possible until you were making money again. However, if you can maintain your current lifestyle you can certainly maintain something less.
Be sure to include ALL expenses. This means mortgage payments, groceries, going out for dinner, etc. Don’t cheat here because when you need it you’ll be glad to have what you expect.
Binary Dollar Says
One tip - Keep your emergency fund in another account. It’ll almost always stop you from tapping into your fund needlessly.
Oct 30th, 2006 at 6:17 pm
digerati Says
Absolutely. I keep mine in a separate bank though theres no particular advantage to that over an additional account.
Oct 30th, 2006 at 11:16 pm