What is an emergency fund?
Emergency funds are savings accounts, built up for dealing with life’s surprises. Some may call it a “just in case” fund.
- Just in case the transmission blows.
- Just in case the air conditioner condenser dies-(ask my nursing assistant what she thinks about this????)
- Just in case your softball nut breaks her leg sliding into second!
- Just in case you or your spouse get laid off…..
As a recent post suggested, your emergency fund gives you margin. A little space between a stressful day vs a financial disaster for you and your family.
So the usual guidance is to decide how much you would need to get by for 3-6 months without a paycheck. This is so important, it was one of the first thing I posted about when I started blogging, “yeeearrs and yeeaars ago!!! (seems like it….)
I wanted, today, to talk about emergency funds in a little more detail. To “dissect it”, perform an “autopsy” or as we say in the Operating Room-let’s fine tune this baby-(well, we don’t normally say that, but maybe I will tomorrow, and see what happens!!!!
So, Let’s Fine Tune This Baby!
First, let’s see what the standard recommendations are:
- You are in debt up to your ………-You need just enough money in your emergency fund to handle the most basic of emergencies. $1,000 bucks seems to be the standard here. The thinking is to pour your extra income against debt, then build up a larger, long-term emergency fund.
- You have a little/no debt, and a stable work situation-3 months expenses might be enough.
- You have little to no debt, but you work contract, or commission and your income is up and down-6 months to even a year is better to help you handle those unknowns.
Now for the fine tuning:
- If you or your spouse are paralyzed by idea of only having a 1,000 bucks in savings while you are blasting away at those credit cards-bump that balance up until you both can sleep. Having extra money in the bank, can help your REM sleep, I promise…..
- If you know a life event is right around the corner-maybe a baby due this year- then quit your debt reduction temporarily, and pile up the cash until you know the ending of the movie-(healthy baby, and mom, and no surprise medical expenses!)
- If you have no debt, but feel better having a huge pile of money in your emergency fund? Then think about putting half in a money market account for easy access, and the other half in CD’s or a short-term bond fund that will pay you a little interest. (remember the post about inflation….) If you have to grab that money, there may be a small penalty, but odds are in your favor that it will grow undisturbed.
- Make your deposits to your emergency fund automatic, so you don’t have to think about it.
- Make sure your money-market account is as high yielding as possible.
- Remember, you are saving for bare bones expenses, not necessarily 6 months of your total paycheck!
A Carnival of Emergency Fund Stories
Emergency savings accounts are so strongly recommended by all the experts, there is no limit to the amount of info you can find, about the why, how, and mistakes in emergency fund management. Here are several posts from other personal finance bloggers, to give you different takes/opinions on this subject. Check ‘em out.
Tips on how to save up/add to, your emergency savings:
From Consumerism Commentary: 50 tips to help you build your fund-50 tips-no more excuses!!!!
Not Made of Money has these tips for funding an emergency account. Tips, tips and more tips!!!
Emergency Fund Investing Options discussed:
Redeeming Riches, talks about your savings safety net, with suggestions for CD Laddering-a way to maximize CD returns.
Personal Finance, By the Book, discusses the use of the emergency fund, to partially self-insure, therefore saving money on your insurance costs-I love the idea of a high deductible health policy/tied with an HSA-makes a lot of sense….
Real world usage of the emergency Fund!
Christian Common Sense saved his honeymoon, (and maybe his marriage) with his emergency fund!
And last but not least:
Now, if you can’t get all you need to know about Emergency Funds, in this article, then you just don’t want to do it!!!
Don’t put it off another minute- make the call, visit the bank, or get online to get your emergency fund started. And when it starts to build, return to the ideas above, to:
FINE TUNE THAT BABY!!!!
Let’s hear your thoughts on Emergency Funds-Do you have one, how big is it, have you ever used it??? Let me know!!