A Look At Emergency Funds

emergency fundsEmergency funds are a well discussed topic in the work of personal finance. Before I started my own blog, I never really considered one. It was a total after thought. As an ”emergency” situation arose, we found a way to deal with it which usually involved rearranging bills in some way and always figuring it out later. This is no way to live.

Who Needs An Emergency Fund?

Since I’m writing this post, my opinion is that everyone needs one. The size of said emergency fund will vary greatly but everyone should have something set aside. Emergency finds are very much not a one-size-fits-all but everyone needs something. Even if you think you have all your bases covered chances are an emergency may pop up that requires the use of fund outside of your normal cash flow. You could have something like an out-of-town funeral come up and need the money to travel. A tire could blow on your car. Things happen! Having even a little set aside will help you sleep better at night.

How Much Do I Need in My Emergency Fund?

How much someone needs in their emergency fund is the main area of argument. Some people argue that a nice round $1000 is sufficient while others won’t sleep until they have six plus months full living expenses banked. I think it totally depends on your situation. The size of emergency fund will depend on many factors including thing such as:

  • Job security
  • Health
  • Insurance
  • Debts
  • Children
  • Pets
  • Vehicle
  • Home/Mortgage

If you’re in debt, I think your cash should be flowing into paying debt off as much, and as fast, as possible. Ensuring you have enough money set aside to pay a small emergency or insurance deductible should be suffice. If you’re debt-free and have a household to maintain including children, you may want to save a few months worth of wages. Totally up to the individual or family, as long as you have something.

Where To Keep Emergency Fund?

Emergency funds should be accessible. Given that this money will only be used in case of emergency, you will likely need access to the money quickly. Having the funds in accounts that will take upwards of a week to two weeks to transfer just doesn’t make sense to me. Sure they may have much higher interest but if you can’t access your emergency fund when you need it is it worth it? I like the idea of keeping at least $1000 immediately accessible (ie everyday chequing or savings account) and if you want to, invest the rest or place in a non-accessible high interest rate account.

I even think having a few dollars in a fire safe in your home is a good idea. Crazy to some, yes, but it may be a good idea depending on where you live. I lived through a hurricane 10 years ago where all the power was down for a week. A massive part of the area I live with had no access to power or water for quite some time. We couldn’t access our banks for three days! Needless to say wasn’t a fun few days.

Emergency funds are very much a personal choice. While I do think everyone needs one, the size is totally dependent on your overall situation.

What size emergency fund do you have and why? 

[Featured image courtesy of http://dribbble.com/apautler]