An emergency fund is an essential part of any debt reduction plan. By creating an emergency fund you are committing a new frame of mind -- moving from a spend to save mentality. You want to have something saved to keep you on track with the rest of your debt reduction plan. You don't want an unexpected expense to throw off your wonderful new budget and send you back into your old credit-using ways!
How the emergency fund fits into my debt reduction plan:
- Build a minimal emergency fund of $500-$1000
- Pay off debt asap
- Build a larger emergency fund of 3-6 months salary
As of right now my emergency fund has a grand total of $569, enough to cover only the smallest of emergencies. Minor car problems, minor medical expenses, emergency travel maybe. If for some reason I was unable to work for any period of time, my emergency fund wouldn't go very far. It would cover rent and a portion of utilities for one month. Of course I'm not expecting to lose my job, but you never know. On the other hand, I can't be prepared for everything. Where should I draw the line?
At the very least I've decided to increase my emergency fund contribution to $50 per paycheck -- thats $100 a month and a big gamble on my good health and reliable car. I'm going to continue at that pace until my debt is paid off, then I'll work building a six month cushion. I also like to think of my debt reduction as an increasing emergency fund. Not that I need to use credit in case of emergency, but the additional money that I pay to my highest interest card could easily be redirected in case of an unexpected expense. The more I pay, the lower my minimum payment, therefore the more that could be freed up in case of an emergency.
Tell me about your emergency fund:
How much is enough for you? How did you decide?
Read more:
- How and Why to Start an Emergency Fund @ Get Rich Slowly
- $3700 in Car Repairs @ Paid Twice
8 Comments:
I decided to go with about $2000 - that would pretty much cover 1 month of expenses, and would probably cover any unexpected expenses like a car repair. But I'm nearly out of debt, and so I'm going to have to re-think this again in a few months.
$0(!)
I actually have a post about just this scheduled to come up tomorrow. The reason I am carrying $0 for emergencies is because I have money sitting in a savings account destined to fund emergencies, cheap stocks, sales, or other buying opportunities. It is essentially my cash position. I find it more convenient since savings account now pay about as good as treasury notes.
These savings have several days of bank transfer time though. To compensate, I simply use a credit card. Hence, my (ultra-liquid) emergency fund sits at a comfy 0.
@ Victory - That sounds right on! I would feel totally secure with $2000. I think I'll keep at my $100 per month until I reach about $2000. That'll cover about a month of expenses here too.
@ Jacob - Good point about the liquidity of a savings account. I keep my emergency fund in a savings account. Thats as liquid as I need it since I prefer to use credit cards in every situations. Why would I pass up the rewards, especially in an emergency? Plus, I like the fact that my emergency fund is gaining interest. Cash under the mattress couldn't even keep up with inflation!
I have $5000 sitting in a savings account that's hard to get at. It's mostly due to me not making an online account for it. So I have to physically go to the bank to get it.
But I almost always have $5000+ in a savings account I have totally access to all the time *loves online banking sometimes*
So the $10000 together would be almost a year of living expenses.
I usually just save what I can and hope for the best. haha. ^_^
We keep 2 separate emergency funds. One is small that is basically a few hundred dollars for small unexpected or forgotten expenses. Like today we saw that t-ball registration was a couple a weeks away. This would come out of that fund. The larger emergency fund is there for major expenses, car repairs, home repairs, etc. This account can only be accessed if both my wife and I agree to take money out.
@ rdrop - Sounds like you are prepared for just about anything :) My small emergency fund is in an online savings account - easy access. (I love online banking too!) I can see how it would be tempting to take it out for less than an emergency - but I'm holding strong!
@ Carpenter - That second fund is a good idea. I've read about them called sink funds? With my minimal emergency fund and non-existent sink fund I'm forced to adjust my budget for any forgotten expense.
Luckily my additional payments towards debt are well above my required minimum payments. So far its been plenty enough to cover unexpected expenses. Thats the only reason I feel somewhat secure going forward without a second sink fund. After I fully fund my emergency fund, maybe I'll go for another small fund for unexpected expenses. Just another piece of mind.
As for the how you manage your funds with your wife, that sounds right on. When I share finances I'd like to have a couple pools of money managed the same way.
i currently have $500 in a just-under-2-month-old emergency fund that i'm keeping at ING - i have both a savings account and an "electric orange" account with them so that, if there is an emergency, all i need to do is transfer the money from the higher interest rate savings account to the lower interest rate electric orange account (transfers from one ING to another are instant) and i can use the debit card for the electric orange to pay for the emergency or take out cash from an ATM. i am sending $50 per paycheck to the ER fund, and as an incentive, when i hit $1000 in there, i'll allow myself to get my next big tattoo. in the meantime, this is goal #4 of my five financial goals, and my overall plan is to have $4500 in this emergency fund (three months of dedicated expenses... that is, until my debt is paid off, at which point it would cover about 5 months of dedicated expenses - crazy thought!).
@ Idub - Sounds like you are on the right track. I smiled when I read that you'd get your next tattoo once you reach the $1000 mark. Sounds like something my good friend Mike would say but wayyyy more responsible. Once I pay off the credit cards I'll be on my way to 3-6 months savings in the emergency fund. Until then, I'm riskin' it!
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