Emergencies are Assured So build your Own Emergency Money Fund

Emergency Fund

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in Cornerstone Series,Savings

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?

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{ 11 comments… read them below or add one }

Craig 2009/09/16 at 1:01 pm

I have a combine vacation/emergency fund set up. I am growing it more for big vacations but have used it recently with some emergencies. For example my old car needed new brakes and my new car has property tax fees which come out of this fund. I hate when I have to use money out of this fund but happy that it is there just in case, even if that’s not the main intentions. Better than not having it, maybe will go on a smaller vacation next year.

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paul 2009/09/16 at 1:23 pm

I think it’s good that it hurts a little don’t you? We’ve been using variable or sink funds for items like car repair, home maintenance, those big emergency areas and we’ve finally built some buffers that we can handle there and leave the emergency fund untouched. It’s very freeing.

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ontheroadto1m 2009/09/16 at 3:53 pm

Great advice, as usual. I’d even try to go for a step 3 where you grow the emergency fund beyond the 6 months of expenses. That’s because in the current climate you or your spouse could become unemployed, and there’s no guarantee you’ll find another job soon -I’m from California, this explains my pessimistic outlook. If that were to happen, you wouldn’t want to be obliged to tap into other types of savings (retirement, etc), so a large emergency fund would come in handy.

Regarding liquidity, part of the large emergency fund could probably be saved in less liquid assets to increase returns, but even if you’re going to leave it in a savings account, I think going beyond 6 months of expenses is still a good idea.
.-= ontheroadto1m´s last blog ..Moms Can Be Driven, Ambitious Workers Too =-.

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paul 2009/09/16 at 4:32 pm

Very true, oh to have more than 6 months expenses in savings that would be fantastic, fortunately I have all manner of toys we could start liquidating if that day came :-).

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ctreit 2009/09/17 at 4:03 am

If my emergency fund starts shrinking, I get very nervous. Sometimes we do tap into it to finance some purchases, but our emergency fund is more than 6 months. – One of my general problems with emergency funds is the wide range that is offered by financial experts. $1000 or 3-6 months? I think in the end our individual circumstances matter the most, including what makes you comfortable. If you need 12 months expenses covered to sleep well at night, I don’t think it is wrong to put even that much money into an emergency fund.
.-= ctreit´s last blog ..Owing more on a house than its value is not necessarily a problem =-.

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paul 2009/09/17 at 8:26 am

I agree on the personal nature of the fund and if it takes 3 years of income to be comfortable so be it. The key is actually having one.

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MLR 2009/09/17 at 8:41 pm

So many people nowadays are having a hard time finding a job in 3 or even 6 months. I don’t feel I have ANY risk of losing my job… but I still socked away about 9-10 months JUST IN CASE.

In my mind, what is that extra few thousand? Security. I’ll gladly put a little more aside to feel secure in the fact that if I lose my job I have some time to get myself collected and pursue a job I want, not just one to pay the bills.
.-= MLR´s last blog ..The 5 Seemingly Obvious Rules That Most People Don’t Follow =-.

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Kevin Cafferty 2009/09/18 at 12:55 pm

I think saving more than six months is a good idea, but I also think if you’re going to save more than that you should keep the six month emergency fund liquid and put the savings beyond that into certificates of deposit (possibly with a six-month term that rolls over) so you can access it easily once the initial emergency fund runs out.
.-= Kevin Cafferty´s last blog ..What’s the best place to stash your savings? =-.

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Peter 2009/09/18 at 10:38 pm

At our house we have a fully funded 8-9 month emergency fund right now just because things seem so uncertain. It gives my wife a bit more peace of mind (me as well), and it’s so freeing knowing that we could get by for many months before we were in too much trouble.

We keep our emergency fund and other funds separate – so we don’t buy a tv or a new car using our emergency fund – it’s untouchable. We keep it pretty liquid in an online account at ING.
.-= Peter´s last blog ..First Time Homebuyer Tax Credit May Be Extended To All Homebuyers And Increased to $15,000 Through New Bill =-.

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Matt Jabs 2009/09/18 at 11:31 pm

Is your uncle the water pump gremlin… and that’s why he’s incarcerated?

Per the EF… I’m a FIRM believer. Like you said, it gives me a warm fuzzy. More importantly, it makes my wife feel more secure – and if momma happy me happy!
.-= Matt Jabs´s last blog ..Should I Invest While Still In Debt? =-.

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paul 2009/09/20 at 9:46 pm

LOL, umm no my Uncle is not in jail, although I did own an AMC Gremlin when I was 16. So there’s your gremlin.

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