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Set Up An Emergency Fund

Do You Have An Emergency Fund? Want To Know How to Do It

Are you the type of person who pays their bills on time or even early? Are you careful with your credit card to always pay the balance in full each month so that you don’t incur an interest charge? Are you putting money into a workplace retirement fund? If you can answer yes, that’s great! The next question might not be so easy.

As a part of your budgeting process, set up an emergency fundHave you created an emergency (rainy day) fund to take care of those unexpected expenses that always pop up? No? That’s an issue you need to rectify… right now! Don’t worry! It’s not hard to develop an emergency fund; but, it is necessary. If you don’t know how to build an emergency fund, or perhaps are wondering what it is, read on and let us help.

An emergency fund is what it sounds like – money put aside to help you take care of non-budgeted, unexpected expenses such as car repairs, job loss, medical problems, etc.. Many of us think that none of these will happen, however they always do eventually. The old saying “Murphy’s law” began there. (If something can go wrong, it will). If you have an emergency fund in place, you’ll be able to weather the storm with no problem.

The magic questions now, is, how much should I put in my emergency fund? There are many schools of thought on this and if you were to ask three financial planners, you would probably get three different opinions. The general rule of thumb is three to six months of your normal living expenses.  Bear in mind that it’s not a “one-size fits all” situation, and if you can put more than six months’ worth of living expenses away, the better off you’ll be.

When the economy was healthy a few years ago, and the prospect of your landing another job was easy, a smaller emergency fund would suffice. Or perhaps your fund was smaller because your spouse also had a job. But what happens if that second income stops?

The economy today is still far from being healthy in spite of what the White House says. Your spouse can become ill and that income stops. What happens then, especially if you adjusted your lifestyle upward, and it takes two full time incomes to service it? Or suppose Obamacare kicks in and businesses cut back on employee’s hours to qualify them as part time to avoid the cost of providing medical insurance? This is not some far fetched opinion…many businesses have already stated this may have to happen.

What size emergency fund do you think you will need if the above occurs? Jobs are not as plentiful and you need to be certain that your family is taken care of. We are of the opinion now that perhaps your emergency fund should be able to cover one year of living expenses. Would you really be comfortable with any less?

Now that you have your emergency fund set up, where do you put this rainy day money? I’ll get an argument on this one from those who are comfortable with more risk, but I tend to be more conservative. If you invest the fund in the stock market, the value can fluctuate quite a bit, and I prefer to keep it secure. Long term CD’s shouldn’t be used either, because if you have a need for the funds before the CD matures, there is a penalty for early withdrawal.

A compromise may be to invest the fund in a conservative mutual fund that wouldn’t have the market fluctuations of a stock investment. Mutual funds tend to have slow and steady growth, and over a period of a year or more, could increase the value of your emergency fund.

Some other methods that you could use to build up your emergency fund are as follows:

- Getting a second job

- Holding a garage sale

- Eliminating discretionary items in your budget

- Cancel gym memberships

- Shop for better car and home insurance policies

- Use any tax refund to repay short term debt such as credit cards

If you don’t have an emergency fund set up, you should seriously consider starting one as soon as possible. We highly recommend getting a good budgeting program to help you set up goals and to get a handle on your entire financial picture.

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About Gust Lenglet

An accountant and tax preparer by profession, Gust's true passion lies in his blog titled "How To Manage Your Money". Through this venue, he not only tries to teach individuals about budgeting and money management, but he writes the majority of the articles as well.

Comments

  1. I never really considered what would happen if my or my husband job ended. I always thought we would always have our incomes unless we retired but I see now this is a mistake and anyone in any position can lose it at any given moment. I am going to look at some of your suggestions. I need to down size on our debt so I can have money to build an emergency fund. It isn’t going to be easy but I would be foolish not to after reading what you wrote and knowing how this economy really is. Great eye opener, I am going to share this with some of my family so they can also start planing better for the unexpected.

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