Why and How to Establish an Emergency Fund

As part of your financial planning for yourself and your family, it is advisable to set up an emergency fund. An emergency fund is cash that is readily available in case the unexpected occurs. Emergencies are typically identified as major health expenses, unemployment, home repairs as a result of an extreme weather event, auto repair or replacement, personal or family problems – anything that is unexpected and not in the family budget. Under most people’s guidelines, a trip to the Caribbean because your tan is fading does not qualify as an emergency. Having an emergency fund will save you from using credit cards to solve a problem. If you do use your credit card, you will have enough saved to pay off the debt immediately.

A general rule of thumb is to have enough money saved to cover your daily living expenses for at least three to six months in the case of job loss. That will keep your head above water while you are out searching for new employment. You just know the day you get laid off will be the day the refrigerator decides to call it a career. Add to that a figure that might cover an emergency home repair or hospital visit. It is hard to predict just what may occur and what it will cost, but a well thought out estimate will help you decide how much your fund should be.

Once you have established the minimum of how much your fund should be, it will be necessary to fund it. Just saying you are going to do it will not do you any good if an emergency arises and your account is empty. It might be wise to have several hundred dollars in cash at home. That gives you something until you can get to the bank to get what you need. Do not hide your cash under your mattress or in the freezer. When on the hunt for quick, easy cash, those are the first places where a crook will look. I would tell you where I hide my emergency cash but a crook might read this and know where to look.

Open a bank account and deposit something into it regularly. Even if it is only a dollar, at least it is something and it will add up quick. Throw your change into a jar every night and once a month take it to the bank and turn it into currency. Put some or all of that into your cash fund at home. If you have the opportunity for overtime perhaps ear mark some of that money to your emergency account. If you hit the lottery for a few bucks, think about saving some of that for a rainy day.

When your bank account has a reasonable amount of money in it, you may consider investing a small portion of it. If you can find a high interest bank account, open one. Just be sure you do not tie too much of your money up in an account you may not be able to get too quickly.

When your emergency fund is at the level you want it to be, maintain that level. You may decide to keep adding to it but at a slower pace. If you have to take something out, be sure you put it back in.