How to Maximize the Effectiveness of Your Emergency Fund

Last updated on: September 12, 2012 at 8:50 am by Darren

How to Maximize the Effectiveness of Your Emergency Fund 2012-09-12T08:50:20-05:00 Darren

LOGO Patheos Explore the world's faith through different perspectives on religion and spirituality! Patheos has the views of the prevalent religions and spiritualities of the world.

Everyone knows that financial experts suggest you have an emergency fund. That’s because when major, unexpected life events happen, such as a job loss or blown car engine, you don’t want to depend on credit cards to bail you out.

If you use debt to cover these emergencies, you’ll be going in the wrong direction on the road to building wealth. For this reason, a strong foundation for your financial house should be made up of a well-funded savings account, which is used just for emergencies.

Borrowing money is generally a bad idea. After all, who wants to pay interest?

But the worst time to borrow is when times are bad. If the economy is doing poorly and you lose your job, you don’t want to be drowning in debt. How much harder would it be to make minimum payments, let alone get out of debt, when you don’t have a source of income?

Fortunately, financial problems tend to occur less often when you have your emergency fund fully-funded.

What’s a Real Emergency?

An emergency is something you had no way of knowing was coming, and has a major impact on you and your family. Examples include:

paying a deductible on a medical, homeowner’s, or car insurance bill after an accident
medical bills resulting from an accident or unforeseen medical problem
a blown transmission in a car that you need to function

With that said, what are NOT emergencies?

A new TV is not an emergency. Wanting a new leather couch, or to go on a vacation to Jamaica is not an emergency. A nice dress for the prom is not an emergency. These are things that you should save for to purchase, rather than rationalize as emergencies.

Where Should You Keep Your Emergency Fund?

Your emergency fund should be kept in a liquid account that it’s easy to get to, without paying penalties or other types of fees.

This means that index funds, ETFs, or stocks are not good places, because you’ll pay taxes on any gains. They’re more appropriate for long-term investing. The purpose of this fund isn’t to make you rich. Your wealth building won’t happen in this account.

CD’s aren’t a good place either, because you’ll probably be charged a penalty for an early withdrawal.

The best place to keep the money for your emergency fund is a savings account that’s insured by the FDIC. It’ll be easily accessible to cover for emergencies, and you’ll even earn a bit of interest.

How Big Should Your Emergency Fund Be?

How much money should you actually have in your emergency fund? Figuring this out is more of an art than science. The purpose of this fund is to absorb risk, so the riskier your situation, the bigger the emergency fund you should have. Most financial experts say that a fund that covers three to six months of your expenses is the minimum amount you should have.

For instance, if you work on straight commission or are self-employed, you should build a fund that will last for six months. Likewise, if you’re single or are a one-income household, you should use the six-months rule. Why? Because in your situation, a job loss is a 100% loss in household income. And if your job situation is unstable for any reason, or if your family is dealing with serious medical problems, you should lean towards a six-month emergency fund.

But if you have a more “secure” job, you could lean towards a three-month fund. Everyone’s situation is different. Customize your fund to fit your circumstances. And if you’re married, don’t forget to take into account how your spouse feels about risk. Since the fund is for peace of mind, the spouse who wants the bigger fund should be given priority.

How much do you like to have in an emergency fund to feel comfortable?

ALL

Previous Post

September 5, 2012

How to Become Self-Financing

Next Post

September 14, 2012 How to Get Your Debt Snowball Rolling

Browse Our Archives

Select a Category ALL Bible and Money Biblical Perspective Book Reviews Budgeting Business Corner Churches and Pastors Debt Encouraging Scriptures Entrepreneurship Faith and Economics Family and Money General Personal Finance Giving Inspirational Quotes Investing Making Money Other Personal Finance Retirement Reviews Round Up Saving Self-Improvement Taxes Uncategorized

Select a Month January 2019 November 2018 October 2018 September 2018 August 2018 July 2018 June 2018 May 2018 April 2018 November 2016 October 2016 May 2016 March 2016 February 2016 January 2016 January 2015 November 2014 October 2014 August 2014 April 2014 March 2014 January 2014 December 2013 November 2013 October 2013 August 2013 July 2013 June 2013 May 2013 April 2013 March 2013 February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 August 2012 July 2012 June 2012 May 2012 April 2012 March 2012 February 2012 January 2012 December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010

TAKE THE

Religious Wisdom Quiz

Who was the brother of Moses and helped him confront Pharaoh?

Select your answer to see how you score.

David Aaron Joshua Joseph