Emergency Fund

What is an Emergency Fund and why exactly do you need one? Pure, plain, and simple Murphy's Law states "if something can go wrong, it probably will." One may hope emergencies will not occur but they are a part of life and one would do well to plan for them. It is sometimes referred to as a rainy day fund and serves the function of providing a source one can draw upon in financial emergencies.

Experts vary on the recommended amount of an emergency fund but a general consensus is 3 to 6 months of living expenses. The expense part is specified because salary includes tax with holdings, automatic deductions placed in a retirement account, or other items not included if a job loss occurs. To determine monthly expenses, track your expenses during an average month and then save for the emergency fund accordingly.

The financial expert, Dave Ramsey, recommends saving up a $1,000 emergency fund first to make it more manageable. 3 to 6 months of expenses can seem an overwhelming amount of money to save but with a $1,000 safety net, one will have the ability to pay for an emergency such as an alternator going out on a car without feeling pressured to incur debt.

Once the $1,000 is saved, it is highly advisable to pay down debt as quickly as possible to further secure your financial life and make things easier if ever losing a job. If a job loss is looming on the horizon, one may choose to go ahead and quickly muster the 3 to 6 month fund.

You want to be able to pay for the essentials such as food, housing, clothing, and transportation. If you become unemployed, you may need 3 to 6 months to search for a new job. Having the emergency fund allows you breathing room and the ability to search for a job without the stress of dealing with financial issues. Unemployment benefits may be applied for but it is best to have your own emergency fund in place as these benefits will eventually run out and may not be enough to cover basic living expenses.

Be sure not to dip your hand in the emergency fund cookie jar. It is intended for EMERGENCIES. A vacation is not an emergency, Christmas is not an emergency (last time I checked it always happens on December 25th), that new shirt/dress/shoes at the store are not an emergency. An emergency means an event such as unexpected medical bills, auto accident, job loss, or a water heater going out.

As far as where to store your emergency fund, you'll want to keep it in something very liquid (meaning you can get to it quickly). This should be something such as a savings account at a bank or money market account. Keeping it in one of these accounts will allow you to earn a bit of interest as well as separating it from funds actively available in a checking account.

Remember, emergencies will happen. Will you be prepared?

See www.daveramsey.com for more solid financial advice.