Thursday, February 14, 2008

You Need an Emergency Fund

You need an emergency fund so start one today. You will sleep better at night, guaranteed.

Why do you need an emergency fund? Your car breaks down. You become ill and are faced with medical bills. You are faced with unexpected travel obligations. Your home needs repair. You lose your job. You get the point.

How much do you need in your emergency fund? There are many opinions ranging from as little as $1000 up to as much as one year's worth of living expenses. What is right for you will depend on your individual circumstances and comfort level. If you are single with a stable job with no dependents and you don't own a home then you probably can get by with a $1000 emergency fund. However, if you have a family with a single income and own a home, then I would recommend a minimum of 6 months worth of living expenses.

So start your emergency fund today and don’t stash your cash under your mattress. Make sure you are earning a competitive interest rate. I recommend online banking.


Anonymous said...

My question to this is what if you have 2 children , 2 steady jobs,2 mortgages, but have alot of debt? I'm thinking 2000 emergency fund is good so we can get out of debt. Any thoughts?

T STruck said...

I think a $2000 emergency fund is great. Keep working on the debt. Once you get the debt paid off, try it build the emergency fund up to 3-6 months of living expenses. Don't use your $2000 emergency fund to pay off debt, however.

Anonymous said...

Don't keep your emergency fund in a bank money market account, put it in a government money market mutual fund with check writing privileges and low fees. The reason, interest payments on bank money market accounts are taxed at your regular tax rate, while interest payments in a money market fund are taxed at a 15% capital gains rate. If you only have $1000 it might not matter much, but if you build to a 6 month emergency fund (as you should), it really makes a difference. Another reason is that many of these funds have minimum distributions. In mine, I have to write checks for more than $250.00. This keeps you from raiding you fund

T Struck said...

Thanks for the suggestion regarding a government money market mutual fund. My ING Direct savings account is yielding 3.40% right now. I also have a ING Direct CD Ladder for my emergency fund and my average yield is currently 5.10%.

I am also a Vanguard customer. Their tax-exempt money markets fund (VMSXX) is now paying 2.89%. This is equivalent to 3.85% if you are in the 25% tax bracket. Not bad. The fund requires $3000 minimum investment. As my ING Direct CD’s mature, I may be looking into these tax-exempt options. Keep in mind, however, that money market accounts aren’t without risk.

What government money market mutual fund are you referring to? I'd like to look into it.

Thomas Watson said...

Great article. Emergency funds are a smart financial decision even if you have a stable job for cushioning the blow of unexpected expenses.

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