The rough economy the last few years has really brought many Americans back to the basics. Back in the day, people used to actually have money sitting in the checking account (or under the mattress) "saved for a rainy day". That whole emergency fund idea kind of went by the way-side when the spending/investing era took off (mid 80's). Sometime around the collapse of the Berlin Wall, people decided that it was foolish to save money in a liquid account for emergencies. It was so popular to just spend it and enjoy yourself (after all, money was so plentiful), or go for the "big gains" in the stock market. Wake up call---jobs are scarce, debt is huge, housing market tanks, oh no! When a real financial emergency does happen, you may need several month's worth of expenses to be available. Most financial experts agree that at least three to six months of expenses are necessary but how much that means for you is the question. First, you need to know how much you really spend each month. You'll need to track each expense daily for several months to get a good idea of just how much you spend. Keep a running log and don't forget the little spends (magazines, coffee, vending machine snacks, etc.). Once you have a good idea of how much you spend each month, figure out how much of that you would actually HAVE to spend if a real emergency took place. For example, even though you might have spent $800 a month on groceries, if a financial emergency took place you could definitely cut way back if needed and maybe only spend $500 or less. Add up all the "needs" and get the cut-throat total. Multiply this by whatever makes you more comfortable (3-6 months) and you will have a good idea on just how much money you need to save in the emergency fund. Keep saving until your fund is fully funded...making sure to keep it liquid. DO NOT TOUCH this money for anything except a full blown emergency! No, Christmas is not an emergency.
I was once a non-believer in accumulating an emergency fund. I figured that if the worst happened and I was really strapped for cash, I would just have to pull out the old credit card (dust it off) and live off it temporarily. But now that I have drank enough debt-free kool-aid, I am a believer in having a fully-funded emergency fund available as MY BAIL-OUT. I've seen the light at the other end of the tunnel and no, it's not from the locomotive coming towards me.
How Much Emergency Fund Do I Need? Transform Debt to Wealth.
