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Emergency Fund Basics

Experts are always saying that you need to have an emergency fund, but what exactly are they, and how much do you need? Here are answers to these questions and more about emergency funds.

What is an emergency fund?
It is money set aside for exactly what it says, an emergency. This includes emergency repairs to a vehicle or home, or living expenses in case of job loss or illness/injury. It is not savings used for a specific purpose like a purchasing a car or vacation.

Why do you need one?
You never know what life may bring you such as job loss, an injury or illness, or a faulty engine in your car. Unfortunately, when an emergency happens, bills continue to come in. An emergency fund can help you through a period of time until you are able to get another job, recover, or adjust your lifestyle.

How much do you need?
Experts suggest that you should have 3-6 months of living expenses set aside. It really depends on your situation, for instance how many children you have or your current lifestyle and insurance coverage. You may have opted for insurance coverage on your vehicle in the case of job loss or injury, which would lessen your needs.

How can you build it?
Make it a point to put money aside. Open up a separate savings account with money automatically deposited from each paycheck. Try to deposit as much as you can, but if you can do at least $10 per paycheck, it will add up over time.

Where should you keep it?
You want your emergency funds to be fairly liquid, so a regular savings account makes sense. However, if you have a significant amount saved, you want to be earning the most you can. Money market accounts and certificates are good for this purpose.


Posted: 9/27/2011 with 3 comments

Categories: Finances, Saving



Comments
Elen Sia
Honestly, the SaveItUp Challenge is a godsend. This year's Challenge was the first one for the husband and me, and we enjoyed it thoroughly. Being already numbers-driven, the Challenge was so up my alley it was almost funny. It became almost a game for us. Tracking every payment made to debt and seeing the debt disappear completely by the end of the Challenge was gratifying. We have already told our FAP that we'll definitely sign up for next year's Challenge. Thank you, FORUM!
11/8/2011 at 8:23 PM

Katelyn Fagan
This is something that is definitely on my to-do list! Hopefully once we get out of more debt we can start saving more and building up an emergency fund.
11/2/2011 at 9:46 PM

Christine Jenkins
We have gone through the Dave Ramsey program ourselves over 2 years ago, and we have an emergency fund of $1000. Not a lot, but it does cover unexpected expenses that have come up, such as needing to get our furnance fixed last winter for $450, or an unexpected root canal for $400, that insurance didn't cover. Once we deplete the savings, we stop paying off our revolving debt (credit cards) until we build the emergency fund back to the $1000. Before Dave Ramsey, our emergency fund was a credit card, or my parents. Now we can breathe a little easier knowing that we have the cash to pay for these unexpected expenses.
10/31/2011 at 10:08 AM

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