7 Questions About Emergency Funds Answered

Financial stability, business success and insurance conceptAre you prepared for financial emergencies? It’s a fact of life, rainy days are going to happen sooner or later. Most people don’t have an emergency fund to weather the storm. Don’t let that happen to you. Everybody needs one.

Unfortunately, “emergency fund” may sound sophisticated and intimidating. It sounds like something only rich people would understand. You usually don’t hear it being explained at school or at home. You still need one.

Here are the answers to 6 common questions about emergency funds.

1- What’s An Emergency Fund?

An emergency fund is “just in case” money. It’s a pile of cash sitting somewhere waiting just in case something unexpected happens. It’s enough money to live normally if your income stops for any reason. It’s your backup when life comes along and smacks you upside the head.

2- Why do I need one?

Anything can happen at any time so you must be prepared. By the way, real emergencies involve income loss, blood or broken bones. Not having enough to buy those new sneakers is not an emergency.

Bad things happen to everybody and we all need to be prepared.  The average person nowadays lives til about 80 years of age. This means you’re more likely to get injured than die before you turn 80. If you lose your income due to injury, illness or job loss, then you’re going to need backup money.

3- How much money do I need?

A fully stocked emergency fund is 3 to 6 months worth of expenses. Not income, expenses. That means enough money to keep eating and paying your bills for 3 to 6 months.

People get confused and think it has to be 3 to 6 months of income. That’s a big number and seems unrealistic to most people. This leads to intimidation and inaction.

Figure out how much you spend each month to eat and live. Write it down on paper. Multiple that number by 3. That’s the least you should have.

4- Where Should I Keep It?

Your sock drawer is not a good place to keep your emergency fund. It needs to be easy to get to but not that easy. Put it in a separate free checking or money market account that lets you write checks.

5- How do I get the best return/ interest on my money?

Some people are worried about getting the best return on their money. That shouldn’t concern you when you’re choosing a place to park your emergency fund. Your money needs to be safe and ready to move within 24 hours. An emergency fund is about safety, not returns. It’s insurance, not an investment.

6- Why 3 to 6 months?

This figure is actually pretty easy to explain. It’s generally all the time you should need an emergency fund for anyway.

If you lose your job, you should be able to find a new one within a few months.

If you are unable to work because you’re sick or injured then your long-term disability insurance will kick in. Disability payments start after you’ve been disabled for 90 to 180 days. 90 to 180 days is 3 to 6 months.

(You do have disability insurance, don’t you?)

Your emergency fund should be enough to cover you until you can replace your income or receive disability benefits. That should be no longer than 6 months.

7- Do I really need an emergency fund?

Are you a human being? We all need an emergency or rainy day fund.

How strong is yours? If you don’t have one, what actions are you going to take today to build one?

Trackbacks

  1. […] You need to get “long-term” disability insurance. Short term income loss can be covered by a good emergency fund. […]

  2. […] already talked about the importance of an emergency fund. There’s nothing like having cash available to make a serious problem […]

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