Just In Case of Emergency

Problem: How much should I save in case of an emergency?

                Emergencies, just like life, are unpredictable.  When someone loses a job, has an accident, or comes across a surprise car repair, their cash flow can be devastated; if you are not prepared.

I hope you have a wad of $100’s saved somewhere!

We can never fully avoid emergency situations, but we can protect ourselves from them to a certain extend by saving in an emergency fund. Don’t know what an emergency fund is? Read on, brave reader. Already know what an emergency fund is? Read on anyway, because you can never be too careful.

What is an emergency fund?

An emergency fund is a separate savings or checking account used to offset the cost of an unforeseen situation. The main distinction between an emergency fund and a normal savings account is that you do not count the emergency fund to your nest egg or long term savings. Why? The only time you will tap into your emergency account is in a time of financial crisis. You will not tap into it unless you absolutely need to, otherwise it just sits there and acts as a shield.

Emergency funds are essential for on the job injuries

How Much Should I Save?

In the Financial Planning world, the rule of thumb is the have 3-6 months of expenses saved up as an emergency fund. While this will vary based upon your type of lifestyle and job stability. This may seem like a lot of money to save up and not touch, and it is. But that is what it takes to protect you and your family. Missing a couple months of rent could have you living on the street if you do not have the savings to cover the cost of living after you get injured or leave your job. Here at the steps I would take:

1.       Figure out how much you spend per month

2.       Project it out to 3-6 months.

3.       Save 5% of your bi-weekly pay and put it away

Where Should I Save It?

Emergency savings should be placed in a stable account where you can access the money quickly and easily in times of crisis. I would recommend an interest earning bank account, either a money market or interest bearing savings account that can be accessed without penalties

You should NOT save your emergency fund in a stock or investment portfolio. These types of instruments might actually put you at greater risk because they might lose value when you need the funds the most. These assets are not as liquid compared to a savings account, which could delay you getting the funds you need.  

When do I Spend the $$?

                The purpose of an emergency fund is to pay for expenses related to an unexpected hardship. Once you realize how many dollars you need saved up to cover 3-6 months’ worth of expense, you will know how much you have to maintain in order to continue to protect yourself. If an emergency does come up and you end up tapping into your fund, great! Just make sure you immediately begin to restore your funds as soon as possible.