Everyone Needs an Emergency Fund

As the new health care reform continues to make waves, one of the major ad campaigns surrounds the concept of imparting to young people that despite their age, they are not invincible. We often see a similar sense of invincibility with many young people when it comes to retirement funds and other financial decisions.

One of the most important aspects to impart, however, is to at least have an emergency fund in place. When I say this I don’t mean having some massive savings investment, but simply finding a way to set aside a certain percentage of your income to build up enough savings that in the case of becoming unemployed, sustaining massive hospital bills or any other such unforeseen expense, we can be prepared.

In my book I provide an example as a method of explanation, which I have reused below:

“As an example, if our total expenses each month are $6,250, then our emergency fund goal would be based on that amount (shown below). To cover expenses for three months, we would save $18,750 in the emergency fund. Then if we’re more comfortable with enough to pay six months of expenses, we can raise the goal to $37,500, and so on.

Emergency Fund Amounts Using Monthly Expenses

One Month – $6,250
Three Months – $18,750
Six Months – $37,500
One Year – $75,000

This is the second layer of protection for our long-term savings and a major step toward financial independence. A money market account is typically used for the emergency fund account because they pay higher interest than regular bank savings accounts. Most have check- writing features and allow three checks to be written each month without charging a fee; some have minimum check amounts that can be written. For more information about money market accounts and features, check with your regular bank or visit the bankrate.com website.
Since the first goal in the example is to save $18,750, we establish our savings plan based on the amount that we can set aside each week from our discretionary income to save this amount. It may take some time as shown below, but don’t lose heart. Every journey starts with a single step, and very often the most difficult part is getting started. The goal is to form a workable plan, begin to save (automatically if possible), and stick with it.

Time Needed to Save $18,750
Weekly deposit = Time Needed
$50 = 7.2 Years
$100 = 3.6 Years
$150 = 2.4 Years
$200 = 1.8 Years

The next goal in the example is to increase the emergency fund to $37,500. Once this amount is saved, we’ll have a $5,000 cushion in regular savings for unexpected expenses and an emergency fund large enough to cover expenses for six months. In addition, the savings plan is automatic through direct deposits into a regular bank savings account, and we periodically move the excess from this account to the emergency fund. Most importantly, we won’t be withdrawing from either of these accounts unnecessarily.”

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