Brandi RhoadesPersonal Finance 101: Do I Need an Emergency Fund?
August 30th 2008 18:06
Personal Finance 101: Do I Need an Emergency Fund?
Yes! Everyone needs an emergency fund, but let’s sort out how much money you need, where you should keep it, and what its purpose is.
Rainy Day Versus Emergency Fund
There are two types of “emergency” funds I suggest. The first is a Rainy Day Fund for small issues that crop up, such as your car needing a new fan belt or a trip to the emergency room. The other fund is an Emergency Fund, which should cover catastrophic problems, such as job loss or disability.
How Much In Rainy Day Fund
I’d like to focus on the Rainy Day Fund, which is what most financial advisors call the emergency fund. The Rainy Day Fund should be somewhere between $500 and $2,000 depending on your income level and how comfortable you are. When you make $25,000 a year or less, saving up $500 is a feat and works well for your lifestyle. As you make more money, plan to put a little more into the fund. Most people are comfortable with $1,000 as a rule of thumb.
Where Rainy Day Money Should Be
The Rainy Day Fund should be available immediately. I’m a big supporter of online banks like ING and HSBC. In fact, I have accounts at ING and love the interest rates and the interface. Transferring money can take up to 3 days, however, and in an emergency, that won’t cut it. Put the Rainy Day Fund money either in a checking account (separate from the one you use daily) or in a savings account at your bank. While you won’t make much in interest, you will be able to access the money immediately, which is your goal with this fund.
Uses for the Rainy Day Fund
Though you may think of rainy day as in “well, we’re bored and want to see a move, but we’ve used up the entertainment budget,” that’s not its purpose. The Rainy Day Fund should have very limited use. In most families, you will use this fund when you have medical expenses you didn’t anticipate, car troubles, or household repairs. The fund doesn’t include much money because $1,000 will cover many of these little mishaps or at least will work as a down payment on major problems. It also will cover an unexpected weekend in a hotel from a power outage and other minor problems.
Yes! Everyone needs an emergency fund, but let’s sort out how much money you need, where you should keep it, and what its purpose is.
Rainy Day Versus Emergency Fund
There are two types of “emergency” funds I suggest. The first is a Rainy Day Fund for small issues that crop up, such as your car needing a new fan belt or a trip to the emergency room. The other fund is an Emergency Fund, which should cover catastrophic problems, such as job loss or disability.
How Much In Rainy Day Fund
I’d like to focus on the Rainy Day Fund, which is what most financial advisors call the emergency fund. The Rainy Day Fund should be somewhere between $500 and $2,000 depending on your income level and how comfortable you are. When you make $25,000 a year or less, saving up $500 is a feat and works well for your lifestyle. As you make more money, plan to put a little more into the fund. Most people are comfortable with $1,000 as a rule of thumb.
Where Rainy Day Money Should Be
The Rainy Day Fund should be available immediately. I’m a big supporter of online banks like ING and HSBC. In fact, I have accounts at ING and love the interest rates and the interface. Transferring money can take up to 3 days, however, and in an emergency, that won’t cut it. Put the Rainy Day Fund money either in a checking account (separate from the one you use daily) or in a savings account at your bank. While you won’t make much in interest, you will be able to access the money immediately, which is your goal with this fund.
Uses for the Rainy Day Fund
Though you may think of rainy day as in “well, we’re bored and want to see a move, but we’ve used up the entertainment budget,” that’s not its purpose. The Rainy Day Fund should have very limited use. In most families, you will use this fund when you have medical expenses you didn’t anticipate, car troubles, or household repairs. The fund doesn’t include much money because $1,000 will cover many of these little mishaps or at least will work as a down payment on major problems. It also will cover an unexpected weekend in a hotel from a power outage and other minor problems.
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