All About Emergency Funds

Here's a piece from Money magazine on emergency funds. It answers the three key questions most people have about emergency funds as follows:

What's it for? Your reserve fund is for the curve balls that life is bound to throw at you: a leaking roof, a blown transmission, a hot water heater gone cold. It's also for unexpected life changes, like the loss of a job, a divorce, or a major illness.

How much should you have? The equivalent of three to six months' worth of living expenses is a good guideline, but take your own situation into account when deciding. If you're part of a two-income household, you might be able to get by on the other income if you lose your job, for example. If you're self-employed and have an irregular income, you might need more to see you through the lean times.

Where should you keep it? Since you'll be tapping these funds in an emergency, it's essential to be able to get the money quickly and conveniently. A savings account, a money market account or a money market mutual fund will all keep your money highly liquid, while paying you a bit of interest. Shop around for the account that will give you the best rate with no monthly fees.

Here's what we do:

1. Of course we have an emergency fund. All of you reading this would grill me if I'd been dishing out finance stories for over a year and didn't have this simple financial step covered.

2. We are on the conservative side, so we save six months of living expenses. Besides, we are a one-income family, so we should be a bit conservative.

3. We keep our fund in a Vanguard money market account. It doesn't earn quite as much as some other options, but it makes shifting money back and forth among our various Vanguard accounts very easy.

If you don't have an emergency fund, you should start taking some steps to get one. Cut some expenses or follow some of my suggestions for making more money and you should have a good-sized emergency fund set up in no time.

Comments

[twins15]

Still working on getting an emergency fund myself...

[Amateur Investment]

Just started mine.

[Ashley Smith]

I've got one for now, but it'll go out the window when my husband and I buy our first house.

[Henry]

I just recently started mine. I'm pretty young so my expenses are lower than most. I do not have to support a family or pay a mortgage or other adult things. The best way to save an emergency fund is to have a seperate account all together. You can't spend what you don't see.

[Mase]

I keep mine in Vanguard's Tax-Exempt Money Market Mutual Fund for the obvious reason -- tax exempted growth. Have about $4K there right now and want to get it up around $10K. With my tax rate, this was, for me, the 'best' of options.