Besides budgeting, debt management, and educating ourselves on “understanding our money,” having an emergency cash fund is the first place to start saving money. The temptation may be to invest in the stock market, or invest in your company’s retirement plan–but the emergency fund is arguably the most important piece of getting your finances in order. An account that is used to stave off unplanned expenses that can often cause financial turmoil. When we have some money put away for a “rainy day” or to handle unexpected financial curve balls, it provides a safety net and peace-of-mind. The money should be readily available and safe to be used specifically for emergencies, i.e. an emergency fund. How much we put away really depends on us, what we can afford, and what’s sufficient to cover our expenses for a period of time. A good rule of thumb is to have 3 to 6 months of expenses set aside. Obviously, if we have unpredictable income, such as commissions, seasonal income, concerns about our employment, a lay-off, or possible job change, then we may want more. Also, if we are having health concerns or potential needs with other loved ones, consider that as well. There are no set rules, but the goal is to make the unpredictable expenses more predictable, and feeling less stressed. Ideally, this money should be in a safe, accessible place, such as a savings account, money market, or in 3-month T-Bills. Most mutual fund companies have a money market option available, but beware of any service fees that may be charged if we don’t maintain a proper account balance. Unfortunately, there are also many examples where people get into a financial bind, and take a loan from their retirement 401(k) as their emergency fund. This isn’t what the retirement monies are to be used for, because they can come with potential fees and penalties, income tax consequences and are supposed to be earmarked for long-term retirement needs.
A couple of examples may help further illustrate: If our monthly budget totals roughly $2,100, then we should shoot for having about $6,300 in an emergency fund. Also, in this same example, let’s say that we have a leaky roof that needs about $1,700 to fix. Then our emergency fund should be $8,000, ($6,300 + $1,700).
As with any saving’s goal, getting started and sticking with it is the best plan for success. Having an emergency fund gives us flexibility and reduces stress.
EMERGENCY CASH FUND
