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Emergency Fund
By Jo Ellen Fritz   View more articles by this author
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October 20

A term you hear frequently, especially in today’s popular press, is an “emergency fund”. You know you need one, and maybe you already have one, but you may wonder what dollar amount you should park in your emergency fund.

Just as the name implies, an emergency fund is just that – for emergencies.  An emergency is anything that is unexpected.  An emergency is not that weekend out of town trip your friends put together at the last minute or that flat screen television you have been eyeing suddenly going on sale. An emergency would be a job loss, unexpected medical expense or your water heater needing to be replaced.

The first step in choosing your emergency fund goal balance would be to determine your basic monthly living expenses.  With that number in mind how many months of living expenses should you have in reserve?  Are you self-employed or is your industry in turmoil?  Then twelve months of expenses would be a reasonable goal.  If you are a household with two incomes - that are not generated from the same company or in the same industry - then six months worth of expenses could be an adequate figure.

With this amount in mind consider some other factors in your life that would cause you to increase the amount you keep in your emergency fund over a six to twelve month base.  A household with children, a chronic medical condition or a large deductible on your health, auto or home insurance would all be reasons to increase the amount you want to keep in your emergency fund.

Place these funds where the money is readily accessible.  A FDIC insured savings account at your local bank, credit union, or an online bank money market would be ideal.  A higher rate of interest or return is not the goal for these funds but rather preservation so that the funds are there when you need them.

Is your goal amount $10,000 or $100,000? Either can seem overwhelming if you don’t have any money set aside.  Do not let this prevent you from acting now.  Set up an automatic draft from your checking into your emergency fund savings account on a monthly basis.  Do you have any items you don’t need that you could sell?  Proceeds from those sales could help jump start the account balance. Make funding this account a priority and a part of your monthly household budget.

When you reach your target balance remember to reevaluate the amount on an annual basis as your situation can change.  If you need to tap the account make it a priority to refund the balance as soon as economically possibly.  Remember part of the benefit of an emergency fund is to take some of the stress out of that emergency.

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