How much is enough for an emergency fund, you ask?
Well, that’s a highly debated topic. The answer is (as always), it DEPENDS. Before I get into how much is enough, let’s back track and talk a little about the purpose of an emergency fund.
Webster’s dictionary says that an emergency fund is “an unforeseen combination of circumstances or the resulting state that calls for immediate action.” That “call for action” is the second part of this topic, FUND.
So, what kind of emergencies are we talking about?
Here are four common emergencies that come to mind:
1-You lose your income. This one is all too familiar to Americans in this economy. When you lose your job, what do you do? Most take out unemployment benefits.
Unfortunately, the government’s unemployment check will barely cover the food bill. To make up the difference, an emergency fund would help ease the strain of unemployment while you search for a new job.
2-Unexpected car repairs. How many times have you hard of people complaining about unexpected auto repairs? Things like transmission failures, blown head gaskets, and serious engine damage.
These problems can cost a pretty penny and most families don’t factor this into their monthly budget. So when a car repair is needed, where does the money come from?
An emergency fund would be helpful. You could use emergency funds for the car repair and your monthly family budget would be unscathed.
3-Home repairs. Having lived with my parents for 22 years, I’m all too familiar with home repairs. Septic tanks, water heater, plumbing leaks, upgrading windows, and air handler units come to mind.
These are not cheap to replace by any means. And what if your house floods? And what if a fire burns everything you own? These are issues you need to plan in advance for. Part of planning in advance is having an adequate emergency fund.
4-Medical problems. We all know how expensive health insurance is. And even then, almost all insurance plans don’t cover 100% of major procedures and medicine prescriptions.
Oh, have I mentioned medical bills are one of the top reasons why Americans file for bankruptcy? Step one is to have great health insurance. Step two is to have an emergency fund on hand.
Now, how much is enough for an emergency fund?
This will be up to the individual and unique circumstances. Many of you know of Dave Ramsey. He created Financial Peace University. His program recommends a 6 month emergency fund.
I tend to agree with him. Some financial experts recommend more than that but most agree that 6 months is a nice cushion to have if an emergency arises.
A 6 month emergency fund should include all typical expenses for a six month period of time. These things include but are not limited to: groceries, rent, gas, insurance, etc…
I also want to point out that it’s better to pay off your high-interest debt before you save for an emergency fund. It’s as clear cut as that. If you have credit card debt, pay it off immediately. Who wants to be paying a bank interest! I’d rather be making interest off of them!
So, where should you place your emergency funds?
I like to keep life simple. Some people make things complicated and have numerous accounts to make an extra .5% of their emergency fund.
I like having all my accounts in one location. I’m with a local credit union and have all my accounts with them. I have a checking account, general savings, and an emergency fund account.
Thanks for reading. Happy saving.