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April 2, 2011

4

The Emergency Fund, and Why You Need One

Hey guys, how’s it goin’?

Can I ask a personal question?  Do you have an Emergency Fund?

If you don’t, you need to start building one.  Now.

An Emergency Fund is one of the pillars of personal finance.  It’s money that you’ve put away to handle emergencies (the name doesn’t exactly bury the lead, does it?)  It’s there to handle those things that can turn your life upside down.  It’s a bulwark against unnecessary debt.  It keeps your anxiety closet relatively empty.  It’s the key to personal financial stability.  It’s the swiss army knife of your finances.  There is no metaphor I won’t torture to illustrate how important it is to have one.

So why do you need an Emergency Fund?  For emergencies.  Think about it.  Let’s say it’s the middle of winter and you wake up one morning to find that your furnace has finally released its last btu.  If you have an emergency fund, you can get a new one straightaway without having to bust out a credit card and end up paying thousands of dollars extra in interest or take out another loan against the house.  Sure, you’ll have to replenish the fund, but at least you aren’t giving any of it away to the interest trolls.

How much of an Emergency Fund should you have?  A good rule of thumb is you should have at least three months worth of regular expenses saved, six months is better.  If you have a house, you’ll need at least $10,000.00 just to be sure.

What’s the difference between an Emergency Fund and garden variety savings?  An Emergency Fund should always be 100% liquid.  It’s there to handle immediate need, so don’t put it in a CD, or invest it in stocks, or otherwise make it difficult to get at.  Just put it into an account and let it collect interest.

What priority should the emergency fund be?  It should be your first priority along with paying down credit card debt.  If you are paying down debt without an emergency fund in place, you’re leaving yourself wide open to erasing all of your gains and falling right back into the hole.

How do you start the Emergency Fund?  Same way you start saving for anything else.

Until next time, keep on saving!

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4 Comments Post a comment
  1. Apr 4 2011

    I always keep at least 3 months in liquid cash. There’s a decent sized taxable trading account as well. Chances are, you get laid off during a downturn in equities anyway, hence, the reason to have money in cash so you don’t have to liquidate shares at the worst time. Ya never know!

    Reply
    • admin
      Apr 6 2011

      Thanks for being the first commenter on my ramblings.

      That’s a very important point in favor of staying liquid. Don’t want to take the chance that you have a major car repair when your stocks are down.

      I make a distinction between my emergency fund and my regular savings. It’s nice to have some extra money in case your emergency fund is depleted, but you gotta put that extra money to work or it will go away by attrition. You have to balance what you need for emergencies vs. getting your money working for you. But that’s a topic for an upcoming post.

      Reply

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