When Do I Use My Emergency Fund?

Financial Wellness Show - Improve the Health and Wealth of Your Money

Did you know the cheapest and safest insurance policy for your financial plan is not an actual insurance policy?

In our previous episode we heard from Kisha. She was a listener who reached out to us for help. In just a few short months she paid off three payday loans and had money in savings.

Two things I took away from her testimony:

1) She never had an emergency fund before

2) Said she never knew what an emergency fund was

I take it for granted that everyone understands what the term “Emergency Fund” stands for. Kisha’s success story pointed out that we needed an episode to further discuss this very important piece of anyone’s financial plan.

Today, Coach Bob joins us to define what Emergency Funds are, when they should be used and what Emergency Funds - or Emergency Savings - should not be used for.

An Emergency Fund is a savings account, separate from other accounts

The sole purpose of an Emergency Fund is to pay for expenses that are not in your budget

Examples of emergency expenses are: Unexpected car repair, medical deductibles, time off from work to care for ailing parents

Benefits of an Emergency Fund:

Not only will Emergency Funds help keep you from going back into debt, they lower stress and bring peace of mind

What an Emergency Fund is not for:

Emergency Funds are not investments, they are a form of insurance

We recommend two stages of saving for emergencies:

Beginning Emergency Fund: A nice rule-of-thumb is to start with a $1,000 fund. It can take care of many sudden unexpected expenses. However, you can make it more if you want.

We do not recommend building an emergency fund that is too big because it takes money away that can be used to eliminate debt.

An exception would be if you know there will be a large expense or possible emergency (birth of a child, expected departure of a loved one, extended time off after surgery). Then we recommend saving all you can until the emergency has passed.

Post consumer debt Emergency Fund: Once all debts have been paid off, other than a mortgage, we recommend building the emergency fund to equal 3 - 6 months worth of household expenses. If it takes $3,000 to run your household (the basics, not including saving for vacations or kid’s college) then we recommend an Emergency Fund of $9,000 - $18,000.

That sounds like a lot, but the peace of mind you will have is priceless.

Always keep your Emergency Fund full. If you need to dip into the savings then your next step is to hold off paying extra on debts or saving extra for anything other than recovering your Emergency Fund to its original level.

How to fill and emergency fund:

• Work overtime at work (if non-exempt)
• Work an extra job (paint houses, yard work, 2nd job)
• Sell unused items on CraigsList or eBay
• Start a small business

Teachers: Did you know you can sell your lesson plans online for extra cash? Listen to this episode http://FinancialWellnessShow.com/18

How much do you need?

Your call-to-action is to set a number for your Emergency Fund, whether it’s a $1,000 beginning account or 6-months of expenses, and set aside some money for it. If you can only squeeze $20 out of your budget this month then put it in a piggy bank. Collect a few of those $20s over the next few weeks and deposit it into a savings account at the bank, an online money market account, or lock it away. The idea is to keep it away from non-emergencies, yet have access to it when you truly need it.

What is your number? My number is $18,000. Coach Dave says their number is $20,000 and Coach Greg maintains an emergency fund of $30,000. However, Coach Taras, who you will hear in our next episode, says he needs a 6-month reserve of $42k! You’ll understand why in Episode 29.

So, what’s your number?