I always tell people that the first thing you should do once you pay off your bad debt (everything besides your mortgage), is to start building up an emergency fund. This will help to reduce the risk of falling into debt again.
What is an Emergency Fund?
An emergency fund is an amount of money that is easily accessible in case of a sudden emergency. Situations like the air conditioner not working on a 100 degree day or the water heater exploding are things that we don’t expect to happen, but can. Being prepared to pay for these without killing the monthly budget are important.
The past few years have been extremely hard on the job market and it almost seems like no job is safe anymore. Having an emergency fund in place can help reduce the stress that can occur on a family if you or your significant other were to be laid off.
How Much Money Should Be In an Emergency Fund?
No matter who you talk to, everyone is going to tell you a different number when it comes to how much money your emergency fund should have. I have heard as little as $1,000 and as much as 12 months of living expenses. Personally, I think four to six months is the perfect amount. If you are a single income family then you might want to consider pushing this to six to nine months.
Right now my wife and I have roughly eight months worth of expenses in our emergency fund and this allows us to feel fairly comfortable if the worst were to happen. We would still be able to pay our bills while our income got back on track.
The best way to start building your emergency fund is by opening a high interest savings account and adding to it each month, by paying yourself first. At the beginning of each month or every other week automatically have a set amount of money set aside into your emergency fund. This will allow you to start saving without even missing the money.
Where Should You Keep an Emergency Fund?
The best place to put your emergency fund is into a high yield online savings account such as Ally Bank or ING Direct. These banks will allow you to have the money easily available, but will also earn you a decent amount of interest compared to your standard brick and mortar bank savings account.
Given the way the economy has been, I would feel comfortable with a 6-12 month emergency fund.
I think that our EF of $1000 is very scary! We should definitely have a lot more. However, we are trying to get out of consumer debt now, so I feel that it’s fine for now….just hopefully nothing bad will happen…like a job loss :(…before then.
-M
I have a huge emergency fund right now but it also is a down payment fund for a property. I like to think that I have almost 2 year’s worth of savings (bare bones). If an emergency popped up I’d be safe.
Definitely agree. The first thing I did when I paid off my student loan was to start an emergency fund and I put it in a high interest TFSA ING Direct account. I definitely helps me sleep better at night knowing I’ve got a cushion in case something happens.
I find having a large emergency fund gives tremendous comfort. I’d rather miss out on some financial investment opportunities than worry if I can handle an unexpected expense.