Emergency Fund? What Emergency Fund?

No, this isn’t the fund that you dip into because you came across an unbelievable 75%-off, sale of your favorite designer, though I do suggest starting a fund for that too – call it the designer fund. But I digress. The emergency fund is the fund that keeps you from becoming homeless when the unexpected occurs.

I’m talking about the unexpected job loss, medical emergency or other major disaster you’ve never dreamed of that negatively impacts not only your mental health, but also your financial health. The best you can do is to prepare for emergencies by having an emergency fund.

Sizing it
I suggest at least six months worth of your living expenses set aside in your emergency fund, sitting as cash.

The reason you want to have three to six months of expenses saved up is that the most common reason for the need of an emergency fund is due to a sudden loss of income. If you lose a job you still have bills to pay and it may take a few months to find a new one.

Starting it
How much you set aside depends on your personal circumstances. For example, if you're paying down debt or living on a tight budget, you'll want to prioritize that over saving. But even a little savings towards an emergency fund is important to do. Just figure out how much you can afford to set aside each week or month and just do it. No complicated formula, no lengthy explanation needed. Just do it.

I usually recommend 10-15% of your net salary should be saved. But, if you feel it is difficult to begin saving simply start with a small amount. Maybe you begin with $20 a week. Then work your way up to as much as you can. You will begin to get used to that money not being there and can keep increasing. And after a while, it’s not a big deal.

Storing it
You should start with a savings account because it is simple to use and generally does not cost anything. I strongly suggest you set up automatic transfers from your checking account to your savings account. That way, you don’t need to remember to save. It’s automatic.

As your account grows you may want to find an account that earns a little more interest. But, I would avoid Certificates of Deposit (CDs) because they lock your money up and what’s the point of an emergency fund if you don’t have immediate access to it? And by all means, DO NOT put this money in stocks or bonds, even if you think you can make a little extra. The last thing you want is the market tanking at the same time that you lose your job…

And after you have an emergency fund established, you can direct savings to investments and retirement planning. That’s what I did. Even though I luckily have not had a reason to dip into my emergency fund, I sure do sleep a lot better knowing that it’s there.