We live in Uncertain Times. However, One Thing is Certain. You will need to pay for Unexpected, Urgent, Necessary Expenses Someday. You just don’t know when. That’s why you need an Emergency Fund.
1. Job Loss
2. Medical/Dental Emergencies
3. Car Repair
4. Unexpected Home Repairs
5. Unplanned Travel Expenses
The Key Point is that these Expenses must be Unexpected, Urgent, and Necessary. Don’t confuse Recurring Expenses with Emergency Expenses. Just because you forgot to save for your Annual Insurance Bill does not make it an Emergency Expense.
How Much Do I Need?
Your Emergency Fund should cover at least 6 Months of Essential Expenses like Housing, Food, Health Care, Insurance, Utilities, Transportation, Personal Expenses, and Debt. You may need more if you have a Single Income Household, work in a High-Risk Industry where Layoffs are common, have Volatile Income, or are Retired.
I like the idea of an “Emergency Budget.” That’s the Minimum Amount you would need to cover your “Essential Expenses” for at least 6 Months.
Monthly Expense Amount 6 Month Expense
Mortgage/Rent $1,500 $9,000
Food $ 400 $2,400
Health Care $ 500 $3,000
Insurance $ 125 $ 750
Utilities $ 500 $3,000
Transportation $ 500 $3,000
Personal Expenses $ 300 $1,800
Debt $1,000 $6,000
Total $4,825 $28,950
How Do I Save That Much?
Start Small. Treat your Emergency Fund Savings like a Bill. Make it Automatic. Save First, and Spend Second. Skip Starbucks. Having an adequate Emergency Fund could keep you from having to declare Personal Bankruptcy.
Where Do I Put It?
It’s Important to build a Psychological Wall between your Spending Accounts and your Emergency Fund. Most Credit Unions will allow you to open an account with a Dollar. You can set a Savings Goal and then increase it as you pay off debt, get a Tax Refund, or get a Raise. Keep it in a Taxable Account…Tapping an IRA before Age 59 ½ will likely Trigger a Big Tax Bill Plus an Early-Withdrawal Penalty.
Do Not put your Emergency Fund in the Stock Market. You are most likely to need this Money during an Economic Recession, when the value of your Investments are dropping and your chances of becoming Unemployed Increase. I was Furloughed from my job as an EMS Pilot in 2010 due to Economic Conditions. My Emergency Fund kept me afloat until my company brought back the Furloughed Pilots.
Some folks might argue that Money sitting in a Savings/Money Market Account is not “Working For You.” I Disagree. Your Emergency Fund is “Working For You.” It is Buying you “Peace of Mind.”
View your Emergency Fund like an Insurance Policy…Only use it for a True Emergency…And Hope that Day Never Comes.
So, what do you think? Have you set aside a dedicated Emergency Fund? How Much? I would love to hear your comments.