Emergency Fund Funds: How Much? Where? How Fast?

You’ve decided to build an emergency fund of 3 to 6 months expenses. So, how much do you need to save? Where should you save it? How fast can you save it?

First off, one quick note, there are those who feel that cash-emergency funds are unnecessary. They believe that if you have a credit card (or available credit) then you don’t actually need “cash” in your emergency fund. I disagree with these folks, not because I don’t understand their premise, but I want to live a “cash-only” lifestyle.

How much do you need to save?

So, how much do you need to save? This depends on what you consider month expenses. For me, my monthly expenses would include the following, necessary items:

• Shelter (Rent, insurance, mortgage payment, electricity, basic phone)
• Food (Groceries, basic cleaning supplies, basic laundry supplies, etc., baby items)
• Clothing (Including clothing needed for a NEW job search, baby clothes, etc.)
• Insurance premiums (Life Insurance, Health Insurance (if tied to job!), Auto, Home, Etc.)
• Cell phones (basic package, for emergencies, job searches, etc.)
• Day Care

As you can see, the above list leaves a LOT of room for individual needs. Maybe you don’t “need” day care, or “need” a cell phone. Think about what you would do if you lost your job. What if your spouse lost his / hers? How much money, every month, would you NEED to survive. We are not talking about living a super-duper fly lifestyle. How much would you need so that you could survive, make your payments, find a new job, and go to bed each night without worrying? Then, decide if you need 3 months, 6 months, 9 months, or even a full years worth of savings.

This is all about COMFORT!!! You want to feel comfortable with your emergency fund. My advice? Keep saving until you feel that you have a decent amount of readily available cash for unforeseen emergencies or loss of job.

For me, my monthly expenses average somewhere around 2000 dollars or so… I have 20,000 dollars saved in my emergency fund, and 4000 in my primary checking account, so I have 12 months of emergency funds available. (Special note: My home is provided as part of my compensation. If I lose my job, I lose my house, so I have a super-big emergency fund!)

Where should you save your emergency fund funds?

Ah, this gets a bit tricky. Your emergency fund needs to be available, but not “too” available. Remember, this money is for replacing a broken washing machine or paying for unexpected health care needs. This money is NOT to be used for that impulse purchase of a Plasma HDTV!

Options:

• Your primary checking account. (Downside? Little or no interest earned on your money. Upside? Readily available, quick access, easy to “keep up with”.
• Your banks savings account. (Downside? There may be fees associated. Withdrawal limits. Upside? Your money makes some (a little) interest.
• An online savings account, such as ING Direct, HSBC, Emigrant Direct, or E-Loan. (Downside? Funds take 2 to 5 days to reach your checking account. Upside? Much higher rates (4 percent of greater), money is more “difficult” to get to, thus reducing chances of impulse purchase!) (If you’d like a referral to ING Direct for a 25 dollar bonus, email me!)
• A taxable brokerage account. There are tons of online brokerages who will allow you invest your money in stocks, money market accounts, and mutual funds. (Downside? If you invest your savings account, your balance could go down, down, down. Upside? If you know what you are doing, your balance could go up, up, up.)
• CD’s with your local (or online) bank. (Downside? Your money may not be readily available, and you will pay penalties for early withdrawals! Upside? Higher interest rates)

There are other options for where to keep your emergency fund. For me? I use ING Direct and my local, primary checking account. I sacrifice a bit of interest for the ease and convenience. I would suggest that you NOT invest your emergency fund. The last thing I want to do is risk my “fall back” money!

How Fast Can You Save Your Emergency Fund Funds?

How fast you save your emergency fund funds depends on how much “extra” money you have left after your monthly expenses. For me, I wanted to be debt free BEFORE I saved for my big emergency fund. Why? Personal preference and math. I didn’t want to save money at 4 percent, while owing money at 7 percent. Also, I hate debt!

Some suggestions:

• Create a budget! Nothing will help you in your financial progress like a good, solid budget. (Click here to read about the budget software that I use!)
• Cut out unnecessary expenses. (Click here for an awesome list of money saving ideas!)
• Get super-serious about saving money. Remember, only YOU can change YOUR future!

I hope this little guide helps you. If so, feel free to leave a comment! Emergency Funds rock!

(Edit for clarification: The Emergency Fund that I am talking about above is your 3 to 6 months expenses AFTER you get out of debt. I believe that you should ALWAYS have a mini-emergency fund of 500 – 2000 dollars, no matter your debt situation!)