Emergency Funds: Who Needs One, How Much To Save, And When To Use It

We all hear about emergency funds from the financial advising shows we see on television, but what are they and do we need to be worried about having one?

Your mother always used to tell you to save money for a rainy day. What did she mean? What could you possibly be going out to purchase on a rainy day? In her own way, your mother was telling you to have an emergency fund. If you read any book that deals with household finance, or listen or watch any financial advising show, they will all advise that families should have an emergency fund.

Why Do People Need An Emergency Fund?

Think of all those times when unexpected and important events arise: your transmission breaks down and it will cost over a thousand dollars to fix it, there is a funeral you need to attend that is on the other side of the country and you need to get plane tickets or you get laid off from the job that you've had for the past fifteen years and there is no severance package. There are plenty of life events where you will need cash fast, so instead of looking towards those credit cards in your wallet that are dollars from being maxed out or pawning your television and stereo, why not build yourself an emergency fund for these unexpected events? Being able to take care of yourself and your family without having to rely on credit cards is definitely a financial triumph.

Who Needs An Emergency Fund?

In one word: everyone. Unless you're Paris Hilton and have a trust fund that is hefty enough to last through several generations, you and your family need to pad an emergency fund and you need to do it now. Nobody is safe from these unexpected events, so protect yourself and be proactive by starting to save for an emergency fund as soon as you financially can.

How Much Should a Family Save?

The rule of thumb when it comes to emergency funds is to have at least three to six months of your normal living expenses. Living expenses would include mortgage payments, car payments, automotive insurance, life insurance, grocery expenses, electric bill, phone bill and all other bills that you pay on a monthly basis. While it is difficult for some families who are living their financial lives on a month to month basis, it is vital that these families put aside at least 30 to 50 dollars a month towards their emergency funds. Some families may think this is impossible to do, but if you forego the restaurant dining, the morning coffees from the coffee shop or the super-super digital cable package, you can definitely afford to put this money aside. It will help you more in the long run than cable television.

When Should a Family Use The Emergency Fund?

Families should tap into their emergency fund only when it is absolutely necessary to do so. To prevent yourself from going into the emergency fund too often, do not put your emergency fund in your normal checking account. That makes it much too easy for you to write a check out of it. Financial advisors will suggest you keep your emergency fund in a vehicle like a money market, where your money is liquid but not as easily accessible as, say, your normal bank checking account. Also, money markets give you more bang for the buck. The interest rates of a money market have been proven to be much higher than a normal savings account. Also, despite what many banks suggest, do not put your emergency fund monies into something like a CD, since these vehicles will not allow you easy access to your money, especially during an emergency. You must always be aware of what constitutes an emergency. Sure, the bath towels going on sale for $4 a towel at the department store may SEEM like an emergency, but it really isn't. Emergencies would include your car breaking down or your house's air conditioning unit stopping in the middle of the summer. Whenever you tap into that emergency fund, make sure you do your best to fill it back to the level that it was pre-emergency.

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