If you are considering any steps at all for getting your personal finances in order your first step should be to establish an emergency money fund. It’s a guarantee that life goes wrong or unexpected. Appliances fail, cars break down, kids get sick, Uncles get incarcerated. You get the drift. So what do you do when life throws you lemons? Do you tap your credit card, your home equity line, your rich Grandmother? Wouldn’t it be so much easier to sleep at night if you had built your very own cushy, soft, warm emergency fund that just beckons to you “Don’t worry, I’m right here, I’ll help you.” So then when the Water Pump Gremlin takes out the water pump in your K-Car you need not worry because you’re prepared. That’s called peace of mind.
The Emergency Money Fund a 2 Stage Approach
Stage 1: A Temporary Emergency Money Fund
If you follow Dave Ramsey at all you’ll know that he calls this a baby emergency fund which equates to $1000 in the bank or $500 if you make under $20,000. I think that’s fine for a start, it’s something that you should be able to throw together quickly and put somewhere safe but available. If you are looking to pay off debt this is where you should start first. You need to be ready when life tries to show up in the middle of your debt snowballing. It’s going to, be ready for it. If you are out of debt then you’ll want to move on to Stage 2 of the emergency fund.
Where am I going to get $1000? With some focus, a little sacrifice and some hard work you can find that $1000. I would even challenge you and say that you should be able to fund this in 30 days with some sacrifice. You can check out my article Find Over $1000 in Savings in a Month for how my wife and I did it, and to give you some encouragement.
Stage 2: The Full Emergency Money Fund. This one goes to 11
Good day and welcome to stage 2. My assumption here is that you are out of debt, except maybe for your home and you are ready to fully fund this baby to a 3 to 6 months of expenses. This is up to you to decide where in the spectrum of comfort you need to be. If you work in an especially volatile job market you’ll definitely want to be up to the 6 months of expenses. If you and your significant other work then maybe you can get by with 3 months. Once again we’re putting the personal in “Personal Finance.” Hopefully you have a handle on your expenses because you track them monthly but if you don’t, this would be the essentials: bills, food, transportation, housing. Anything that you wouldn’t be able to sacrifice should be included in your total. For instance if I have $3850 in monthly expenses and I’m aiming for a 6 month emergency fund cushion I’ll want to save up $23,100.
Where to Put your Emergency Money Fund
Under your mattress is the wrong answer. Thanks for playing. There will be no parting gifts. Seriously your emergency money fund needs to be safe but accessible. My recommendation would be a credit union or bank. If you are in the United States then you absolutely should make sure that it is insured by the NCUA if it’s a credit union and the FDIC if it’s a bank. This will insure that at a minimum that $250,000 of your hard earned money is federally insured by the US Government. You can setup a money market savings account and earn a little interest on this money but the key is that it’s available when you need it. There are a plethora of online savings options with decent rates that you might want to explore, one of the favorites being ING Direct. I personally have not tried any of these options as of yet so can’t recommend one over the other. Check out Credit Union options, they often have some really good savings rates. My particular credit union gives 7.75% for the first $1000 in my account and then currently 1.5% on the remainder above $1000. It pays to check around a bit, look for a credit union that you might qualify for because of an industry you work in, family members, or some special entrance requirement they often have higher rates than the more general membership credit unions, and usually better service too.
Couldn’t I be earning more on my Emergency Fund?
You could but it would be in a much less liquid state. I would only recommend a savings account or a money market account. In some instances a no penalty withdrawal Certificate of Deposit would work as well, but there are so many loopholes and rules with them you might find it difficult to withdraw that money in a severe time of need. Not a place you want to be. So if you are going that route I would definitely investigate thoroughly. In the future FiscalGeek will review some of these options in depth so check back often, better yet why don’t you sign up for our free updates and you won’t miss a thing?