An EMERGENCY FUND, also referred to as a rainy day fund, is money reserved and set aside to cover personal financial difficulties. A personal financial difficulty may include but is not limited to the following:
- Job Loss
- Excessive Medical Costs
- Major Heating Expense
- Major Air Conditioning Expense
- Extensive Car Repair
- Other Major Expenses
An unexpected expense, when you are broke, may feel like an emergency. A proper budget (Budgeting Article) and emergency fund will reduce the stress of unanticipated bills. Each month, you should anticipate and save for expenses such as car maintenance, home repair and dental work.
Your emergency fund is a valuable wealth building tool. Financial freedom and increasing your Net Worth begins with an appropriate emergency fund. View my Net Worth Millionaire Plan for a step-by-step personal financial process. This plan will walk you through when to save for an emergency fund, retirement, kid’s college and more.
According to GoBankingRates, 57% of Americans have less than $1,000 in a savings account (GBR’s Savings Article).
If you want to change that, read below!!!
RECOMMENDATIONS
I recommend that you save enough money to cover approximately 3 to 8 months of your regular monthly expenses. A couple of factors to consider are as follows:
- Perceived job security
- Amount of consumer debt-loans and credit cards
A person with a fairly secure job and with no debt may lean towards saving 3 to 4 months worth of expenses. However, a person with no job security or severance plan should aim towards the higher range of 7 to 8 months.
My wife and I, currently have between 4 to 5 months of a rainy day fund. This is in case we both lose our jobs at the same time. We have no consumer debt such as credit cards, student loans or car loans. Hence, I feel that our emergency fund is appropriate. Also, the likelihood that we would both lose our jobs in a close period of time is relatively low. Therefore, if only one us loses our job, we will have approximately 7 to 8 months of a rainy day fund. Any additional money that we save is applied to our Net Worth Millionaire Plan.
Additionally, this safety net allows us to take on some calculated risk and stretch our budget. We do not need any short-term money. Therefore, we stretch our budget to invest every dollar into our retirement account, kid’s college fund and paying off our house.
SHOULD IT BE INVESTED?
An emergency fund should be saved in a traditional checking account, savings account or a money market account. This account will be separate from all other accounts. I realize that some of our Money Gogglers will want to invest it. This is NOT an investment. This is a safety net designed to cover major personal financial difficulties.
My emergency fund is not invested in the stock market because of its risk and volatility. I regularly invest in the stock market and understand its importance for long-term wealth building. However, my rainy day fund is not an investment. It is intended to be a safety net. Your safety money, saved in the bank, will guarantee that it will be there when you need it most.
YOUR EMERGENCY FUND ACTION STEPS
1-Open a Money Market Account or a traditional Savings Account
2-Save one month worth of expenses into that account
3-Invest up to your Company’s match-401(k)/403(b)
4-Payoff all debts (excluding your home)-smallest to largest
5-Decide how many months of an emergency fund you need-must be between 3-8 months
6-Save for your full emergency fund (add this to your one month emergency fund)
In summary, a proper emergency fund will provide you safety; as well as the foundation to which you can build your wealth. Once you do this, you will have the comfort of knowing that you can handle unplanned personal financial difficulties.
