So just how much does someone need to keep in an emergency fund?  This is where the debate usually starts. There are many answers to this question and answers range from almost nothing (for now) all the way to a full year’s worth of expenses. To begin finding your own number start with whether you currently carry any high interest debt like credit cards or payday loans. If you do have such debt, it’s recommended that you should have at least one thousand dollars set aside before you even begin to tackle paying down your debts.  This will provide you enough cushion to cover minor surprises and hopefully keep you from having to pay overdraft or similar late fees.

Depending on how much life you have to support it may make sense to build up even more of a fund before attacking your debts.  For example, if you are a single renter without children and have a fairly stead job, then a thousand dollars might be plenty.  If instead you have a family to support, don’t get along with your boss, and have a mortgage to pay, you should consider saving five or even ten thousand dollars before turning your focus to debt repayment.

Note: Keeping extra cash instead of paying down debts is of particularly high importance if your credit is maxed out.  If you still have credit remaining, and are sure that will not change soon, then paying down your balance will make more sense as you can  (worst case) borrow the money back again if needed.

Once your debt has become more manageable, or if you do not have any high interest debt, then the goal is to build up a properly sized emergency fund.  What’s the right size for you?  That will depend on several factors.

How stable is your job or income?

Emergency funds are often thought of as only covering unexpected expenses that arise in life.  But losing one’s job is the worst kind of expense – the one that kills your income.  If you have nothing coming in for the month even small expected expenses can feel like an emergency very quickly. Without a proper amount of money set aside to cover all your bills in such an event you may quickly find yourself relying on credit cards, family, pay day loans or worse to get by until you find new employment. Continue reading →

After one decides that they need an emergency fund, and hopefully you agree that you do, the next step is actually setting one up.  This is different than setting up a 401k, 529 Plan or IRA because there’s no real thing or product called ’emergency fund’ – it’s just a concept.   In theory you could put all your money in an old sock and it could be your emergency fund.  Or you could simply mentally set aside money in an account you already have and say “I will not touch this $XX unless it’s an emergency”.   But, while we’re here we might as well focus on what would be the ideal and forget about the old sock.

There are a few requirements for a good emergency fund:

It should be safe – The money you put in must be there when you need to take it out.   This rules out the old sock, drawer or freezer.  Even a safe in your home doesn’t suffice.  Why?  Because these things can be stolen, misplaced, lost or burned up in a fire.  Better it should be somewhere very secure and insured against whatever may happen.

It should not go down in value, but grow safely – You do not want to put this money into any sort of investment that carries risk.  The last thing you want is Continue reading →