The Importance of the Emergency Fund

Saving up for a Rainy Day

Close your eyes and imagine a situation with me. You walk into work and are called into your boss’s office. She tells you that there is going to be downsizing and that it doesn’t look good for you. She gives you a one week notice; Friday will be your last day. As crazy as this sounds, I’m sure we all know of a friend who suddenly lost their job. Or we all know a friend that was in an unfortunate tragic accident and is no longer able to work. Sometimes its major trouble with student loans or tuition. The fact is, the unthinkable can happen at any time. Are you prepared?

Hopefully none of the above situations will ever happen to you. Hopefully though, you will realize that they could happen to you and you will take steps to insulate yourself from such a disaster. Hope for the best, prepare for the worst. We all need to have an emergency fund stashed away.

Depending on how you ask, you’ll get various answers as to how large your emergency fund should be. I’ve seen anywhere from a $1,000, to 3-6 months all the way up to a year as a recommendation for the size of your emergency fund. The size of yours will depend on your needs. If you’ve got a family or are thinking of starting one, it’ll be a little bigger, as will it be if you own a house or have a serious medical condition. Other young professionals will find that they will be able to bounce back quickly. My recommendation is 3-5 months of your expenses, stashed away in an account for emergencies only.

Where should I keep this money?

This money should be completely liquid. Don’t put it in stocks or bonds or even in a CD (certificate of deposit). Don’t even put it in your regular savings/checking account. I believe that the best place for this fund is in a separate bank account, where you won’t be pressured to dip into it, when the going “gets a little tough”. This money should be ready at a moment’s notice.

What classifies an emergency?

If you have to ask this question about whether or not to break into your emergency fund, the answer is most likely “no”. Being a little short on the rent this month, or not having enough to go out this weekend aren’t examples emergencies. If you’re short on the rent, deal with it. Say no to other activities in order to make it happen. An emergency will normally start with the loss of a job or a large disruption in your income flow. Medical or family circumstances are also valid uses for this fund.

I lost my job, now what?

Well, hope you get a job before your emergency fund runs out! If you do find yourself in an emergency situation, start thinking smart. No more going out, no more spoiling yourself. Buckle down and only spend money when necessary, and when it will help get your out of the situation. Stay positive and keep your chin up.

No one expects it will happen to them. You can’t always rely on others when you find yourself in a mess. You have to start taking responsibility for yourself, and that includes having a safety net ready.

If you don’t have one already, start ASAP!

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