Until about a year and a half ago, I had no such thing as an emergency fund. While I was responsible and I had a savings account, I never felt that bad about dipping into it if my bills were higher than normal or after the holidays. After my husband became unemployed, I understood just how important it was to have at least 6 months worth of living expenses saved up. And I started saving. It took a little more than a year, but we saved up 6 months of expenses! Oh yeah, and that was on one income.
According to USAA, about 22% of people have NOTHING saved in an emergency fund! If you're one of them, don't fear! It's not too late! You have to start small - put away what you can, and try to set up automatic deposits from your paycheck. It's easier to not spend money you think you don't have. Next, make sure you have easy access to it. I wouldn't recommend putting it in a long-term CD. Your emergency fund has to be somewhat liquid so you can get it quickly when you need it. Last, look around for the best rates - check out Bankrate or Mint. You want to make sure your money is getting the most interest it can.
Another important thing to remember about your emergency fund is that it is not a fixed amount for everyone at any point in time. Since my husband and I just bought a house, we have to adjust how much we have saved and contribute a little more to cover the mortgage payments. Did you recently have a child? What about buy a new car? Anything that you would consider essential to living your life needs to be counted for in your emergency fund - don't short yourself. Evaluate every time you add a significant expense to your life.
What about you? Do you have an emergency fund set up? How long would it be good for?
*A couple weeks
*1 month - 3 months
*3 months - 6 months
*More than 6 months
*What's an emergency fund?
Leave your answer in the comments below!
My emergency fund is currently non-existent due to my wife's grad school. It'll probably be about 3 months of liquid cash when it's there, because I can access a fair bit of stock without penalty and because my job is (a) very stable, (b) I could quickly get a new one if I lost it (yay computers!) and (c) I have insurance up the wazoo. Also my wife will hopefully have a job too, further adding to the stability.
ReplyDeleteOne other thing to mention is that you need to be clear on the interaction between your emergency fund and your "big ticket" savings fund. If you're saving money for a down payment, for example, that money can count towards your emergency fund (since you wouldn't buy the house if you had an emergency), right up until you actually buy the house - then you need to have a separate fund.
One thing to consider is laddered CDs. Let's say you have a 6 month fund. Put one month worth into a CD expiring in 6 months. Then next month, put one month into another 6-month CD, and so on. When a CD expires, roll it over. Once you have this set up, you have a month of savings available penalty-free at any time, and the next two CDs can be withdrawn with penalty but the penalty will be less than the interest you already earned on them in that 6-month cycle. Given that you should access your emergency fund only a couple times in your life, the interest you make on this approach will fairly significant, and even if you have to use it more often, the amount you'll lose in penalties is not very large.
Ours will cover about 9 months of expenses right now. Our goal is to have it cover a full year, but we're super conservative with our money.
ReplyDeletehttp://meredithsheffield.blogspot.com
David - you bring up a good point about the difference between an emergency fund and a big ticket fund. For awhile, our house downpayment fund was also our emergency fund. But we made sure to not deplete it and the 25% that was left is now back in our emergency fund. But what if you bought a house and then a few weeks later had an emergency? It might not be a bad idea to still have both.
ReplyDeleteMeredith - good for you! 9 months to a year is super impressive and I'm sure took a ton of dedication!
We have one month of our combined take-home salaries in an emergency fund. But I wish we had more.
ReplyDeleteThen we also have some big ticket item funds.