I want to discuss the benefits of an emergency fund. Before we get started what is an emergency fund?

An emergency fund is for those unexpected life events,

1. Job Loss
2. Medical emergency
3. Dental emergency
4. Unexpected home repair
5. Car trouble
6. Unplanned travel

First off you might think that these can be budgeted and I would agree with you, but sometimes things are overlooked or you are just not thinking about it or life just happens. Do you budget for a broken arm? How about a transmission? Or a sudden death in the family?

How large a fund should you have? Where should you keep it? When do I use it?

Think you don’t need an emergency fund, well I will tell you that you are wrong, seriously wrong. It does not matter how good a budgeter you are something unexpected will happen.

I have an emergency fund for my emergency fund and it certainly came in handy this year.

Several years ago i started building an emergency fund and thought that a $1,000 fund was a good place to start. Then I thought how about $5,000. I then built a more solid fund which I will outline later on.

I never include the $5,000 as part of my emergency fund, so I refer to it as my emergency fund for my emergency fund. Well it came in handy this year. We had a series of events that caused us to have to tap into these dollars.

I was cruising along in my truck, cruise control on when all of a sudden the cruise shut off. Strange? Stepping on the gas not getting any power? What is going on? I was about to exit and going downhill I exited. Anyway the truck would not go over 40 mph. What? Ok get it to our service place. Well finally I pulled into our service center just ahead of closing, so it was a bit late to get it diagnosed. The next day I get a call informing me that the repair would be about $4,000. Well let’s just say I did not react with kind words. After some negotiating for a better price I authorized the repair. It made sense to repair given the value of the truck was over $20,000.

How am I going to pay for this? This will really create some budget issues. Having an emergency fund softened the blow. I was not scrambling to find ways to pay for it. I certainly was not happy! Over the next couple of days I adjusted my budget to replenish this loss.

Crisis Avoid

If I did not have this emergency fund I would have borrowed from a credit card or some other source. While this was a major expense it did not cause a major crisis, just a major inconvenience and a couple of unhappy people. This was a major expense.

Well life goes on. Next we encountered the need to purchase new tires for our Caravan. We had been aware that we needed some front end work and had budgeted and planned that repair. We were hoping to avoid purchasing tires until perhaps next year but they we definitely in our future. Well the tires were not safe and we needed a new set. Another unbudgeted item. Some $500 to replace. An emergency? Well we thought so since the tires had metal showing. Not safe at all. Well good thing for that emergency fund. More budget adjustments to replenish our emergency fund. The Caravan now has new tires should be good for a few years!

Then there was that leak in the bathroom, not real bad but I knew at some point a professional was going to be necessary. May be I could fix it. It was only a small leak. So I came up with some ideas. Bought what I thought was needed and gave it my best shot. Well I created a plumbing emergency. Water all over, sure I fixed it! Now I needed a professional. It was a Saturday night and I paid extra because of that. I had made some adjustments to our budget but not enough. Another use for our emergency fund. Good thing we have one!

Were we in some kind of bad streak or what?

These unexpected repairs were sure causing havoc with our budget. But the fact that we had an emergency fund turned them into an inconvenience not a major problem and it did not cause us to have to beg or borrow to cover them.

Well there is nothing like going out to start your car and it won’t start. A dead battery. Really, what next? Oh yeah the batteries in the truck were dead. The truck requires two so it is double the cost. No waring no expectation that they were going. Oh no! Well another unexpected expense, you got it, not budgeted. Emergency fund again. Not going through a good period with all these emergencies.

And then there is Christmas another emergency. Well no we budget for that but some folks don’t and it is an emergency.

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So now I hope you see the value of an emergency fund. Think of it as an insurance policy. It needs to be available when you need it. You cannot lock it away in some investment such as a CD (certificate of deposit) or a mutual fund. It must be liquid for these unexpected life happening. I would suggest a money market account or a saving account separate from your other funds but accessible for these types of events.

How much should your fund be?

This will be different for everyone. I will make the basic assumption that you have a budget. A budget that lays out all your expenses. Review all these expenses and begin to mark them in some way. Which ones will need to continue if your income stopped for some reason? Rent/mortgage payment, food, insurance other life necessities. You may need to really tighten up your spending if you are forced into a situation where this security blanket is what you are living off of for a while.

I have built my emergency fund based upon my annual expense spend. I know I need to pay the mortgage, I need to pay for insurance (home, auto, life and health). I really prefer to eat so I have included food. For some items I have decided to create a one year reserve. I have done this for insurance, property taxes, and a few smaller expenses. For expenses such as my mortgage payment I have provided for six months.

One may say that I have a larger than most, emergency fund, but it is mine and it makes me feel comfortable. So the short answer as to what your emergency fund should look like is do what feels good for you. It is protection against a potential loss of income for one reason or another. The general rule of thumb is three to six months of your expenses. You decide which expenses. I have given you some examples of what should be in the fund. Hey if you really need cable then include that. I would not, but hey food is important and having a roof over my head is as well.

General Guidelines

This fund will generally run from $10,000 to as high as $30,000. Remember you don’t plan on using it but you saw how it saved me some headaches. You are creating an insurance fund so that you do not need to borrow or scramble or whatever if some unexpected situation occurs. And believe me something will.

I personally consider this a basis foundational step in building wealth. We all know that the use of borrowed funds via credit cards or personal loans is stealing your wealth. The ultimate goals is to be debt free. Without this fund you will need to use that credit card or borrow to get past these life events.

Remember it is an emergence fund, not a vacation fund or I really, really have to have that new cell phone model. Think emergency.

So if you are just beginning on the road to getting out of debt and righting the ship to begin to build wealth and you do not have two nickels where do you begin? Begin at the beginning. Start slow and build up a fund.

You are trying to eliminate debt. You are eliminating the use of credit cards, so you need to replace them with something else. Develop what has become known as a starter emergency fund until you can eliminate your debt.

Build a starter Fund First

I would suggest that you target a $1,000 fund. This will not cover all of the unexpected but it will get you away from the credit cards. Begin with a $100 you could certainly raise $100. Then target $500. Then build to that $1,000. Once you have that eliminate all those personal loans, credit cards and any other consumer debt.

Once you have eliminated all those annoying little debts which also includes student loans. Basically everything but your mortgage payment you are then ready to develop the permanent emergency fund discussed above. Once developed this will eliminate the need to ever borrow for those unexpected life events.

So the best place to start is at the beginning so get started as this is an important building block to developing wealth.

Once you have all those credit cards and other loans paid off you can use those payments to build your emergency fund. Be very intense in building this fund just like you were in paying off your credit cards, car loans, student loans and other personal debt.

So time to get busy in building your foundation to financial independence.

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Other articles of interest:

10 Easy Steps to Creating a Budget that will put you on the path to Financial Independence

How to get out of Debt: Three popular Plans

4 Payoff Credit Card Debt Strategies

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