Emergency Fund
Why do you need an emergency fund?
An article at bankrate.com outlines in great detail as to why an emergency fund is required. A few of the unexpected financial cracks are
1) Car breakdowns / repairs
You never know when your car is going to breakdown. You cannot anticipate this. Though you might have car insurance, you might have to pay a minimum deductible before your insurance covers the rest. This minimum can range from $100 to $2500.
2) Losing a job
Both me and my husband hold high tech jobs. So there is always a chance of losing our job with the market fluctuations. We need to have a reserve that totals to atleast 6 months of our household monthly budget.
3) Last minute travel emergencies or vacations
We don’t put aside money for travel. So when we plan our vacations, it would come out of that month’s income. We would try as much not to touch our emergency fund.
4) Medical emergencies
I haven’t faced one. But I would like to have about $10,000 for medical emergencies.
5) Safe feeling
I personally look at investing in stocks and mutual funds as a long term investment. So when the market fluctuates and goes south, the emergency fund would keep me from making any impulsive decisions to buy or sell any stocks.
How much money in an emergency fund?
Including the above categories, the amount that we are comfortable for the emergency funds is $50000.
Where should you have the emergency fund?
1) 3-month CD : I do not prefer this one because I will not have access to the account for 3 months. For me this is not ideal for an emergency fund. Also online savings account offer almost the same interest rate as those of 3-month CDs.
2) short term bond fund : Same as the 3-month CD
3) High yield savings account : I pick this because of the ease with which I can access the money and also because of the competitive interest rates.
When to use the emergency fund?
This is a habit I want to emulate from my father. He saves money for a future event expected and unexpected. But when the event occurs, he tries as much not to use the emergency fund. He tries to cover it with that current months income. I think this is the best way because it is very hard to set aside money. I would prefer not saving anything for one month than touching what I have already saved.
My goal for year 2008 looks at filling 80% of our emergency fund. The rest would go towards reducing our debt. It is a conscious choice that we made. Any extra income that we receive would be funneled into our emergency fund. So if everything goes better than we estimate, we should have our emergency fund completely funded by end of year 2008.
