Emergency Funds for College Graduates

May 23, 2009

Emergency funds are for old married people, not recent college graduates, right? Just scraping by financially is an art form perfected by many college students. Creative ways to earn extra money in college and spend as little as possible helped you make it through school.

Now that you’re leaving college and looking for a job it’s time to start thinking more long term about your finances, if you haven’t already.  Once you get that first paycheck, you’ll have every urge to spend that money on a bunch of stuff that you don’t need. Resist the urge, and start saving some cash for an emergency fund.

How Much Should You Save?
$1,000 is a good start, but eventually you should try to save up about three to six months of your monthly expenses. That sounds like a lot of money, but your basic monthly expenses would only be calculated using your bills that provide your essential living expenses such as rent, utilities, food, and transportation.  You can even suggest contributions to your emergency fund as a college graduation gift.

What Should You Use Yor Emergency Fund For?
Defining an emergency is important for knowing when to use the money in your emergency fund. It’s not an emergency that you don’t have an LCD TV, and you want one. It’s not an emergency that you want to take a trip to see your old roommate. Some people go as far to say that unexpected car repairs and house maintenance repairs should be budgeted separately from your emergency fund, because it is reasonable to believe that you will need to make car and home repairs at some point.

I am not that hardcore, but my advice is to limit yourself from using the money unless you are in a dire situation. Losing your job and unexpected medical expenses are two major reasons for using your emergency fund. These two events can destroy your financial health, and the emergency fund acts as a safeguard to prop you up while you go through a difficult situation that limits your income.

What Could Happen If You Don’t Have an Emergency Fund?
Chances are you’ll end up relying on credit cards. Many young people are taught they should own a credit card for emergencies. If you make a habit of relying on credit cards to bail you out of a bad situation, you’ll rack up more credit card debt than you can imagine; this is exactly what happened to me while I was in college.

I put car repairs, books, health expenses, shortfalls in monthly income, and other expenses on a credit card, and I walked out of school with $8,000 in credit card debt. Don’t let this happen to you whether you are in college or just graduating. It will add up quickly, and you’ll spend too much of your hard-earned money paying credit card interest.

The importance of an emergency fund is not a news flash. Personal finance experts talk about them all the time, but still, many young people fail to save for one. Don’t get caught up in the frenzy that you “need” a new car, new furniture, and new clothes. You can get those things later. Save up some money right away to safeguard yourself from disaster.

Where Should You Keep Your Emergency Fund?
A free, online savings account is my preference for parking short-term savings cash. I like the ING Direct Orange Savings account. The interest rate has dropped considerably, but it has an easy to use interface, quick transfers, and the ability to set up sub-savings accounts. You can also open an ING online checking account with a debit card to make it convenient to access your money if an emergency arises.

Luckily, deciding where to keep your emergency fund is the easy part since there are many good FDIC insured alternatives.  Here are some of the best online savings accounts:

Erik

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Erik
Erik Folgate is a husband and father living in Orlando who's been writing about money online for 6 years. Digging himself out of $20k of debt after college and his former experience in the insurance industry give him some useful insights into personal finance issues.

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