Everything You Ever Wanted to Know About Emergency Funds
April 26, 2007
An emergency fund is a personal thing; each person approaches the topic in a way that best suits their situation. Several personal finance bloggers teamed up to answer the following reader question, each with their own point of view:
Is there such thing as saving too much money in an emergency fund? What’s the best place to keep the money you do save so it still earns you something while just sitting there?
The three posts listed below contain answers to this question from Lazy Man & Money, Binary Dollar, Money Matter, & More, The Digerati Life, and Suns Financial Diary. Following the article links I’ve summarized some key points made by the writers and from reader comments:
Many people have no emergency fund at all. If you have one, you’re on the right track. If not, start saving up and you too can have some peace of mind.
An emergency fund should be easily available. The assets should be liquid and the more you depend on it, the lower the investment risk should be.
The recommendations for how much money you need to save in your emergency fund range from 3 to 6 to 9 months of living expenses, with one person attempting to save 18 months worth. A good minimum is 3 months; then depending on your situation and comfort with risk you can save more from there.
Consider whether your living costs will likely increase or decrease during an emergency period to help you plan the amount you’ll need.
Insurance can be viewed as part of your emergency strategy. A mixture of short or long term disability, auto, home, health, and liability insurance can help offset your risk levels and the amount you need to save in an emergency fund.
The different options that were discussed for where to keep your emergency fund money are a money market fund, your checking account, a high-yield online savings account, and 4 week Treasury Bills.
One other choice for homeowners that are less risk averse is to put your money in a less liquid investment and open a home equity line of credit. You can tap the line of credit immediately if needed then liquidate your investments over time to pay back the money borrowed form home equity.
You can also consider spreading your money over a spectrum of financial vehicles that become less liquid and carry higher returns as you move down the spectrum. For example, have 1 months cash in your checking account, 1 month in a high-yield online savings account, 1 month in 4 week Treasury Bills, then another 3 months in a CD.
When you’re calculating how much to save be sure to consider any passive income you have coming in, which might offset the total amount you need in your fund.
Emergency Fund Wrap Up
Emergency funds are one of those things you never really think about until you need it and then it’s too late. Hopefully, this week’s coverage of emergency funds has answered any questions you might have about emergency funds and inspired you to begin one if you haven’t already. If you have questions that weren’t addressed, let me know through my contact form and I’ll get back to you with an answer.
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All posts by Ben Edwards