Wednesday, March 11, 2009

How much do you need for an Emergency Fund?

The answer to this question isn't all that straight forward. Suzy Orman says you need 8 months of living expenses socked away. Others say 6 months or even just a few thousand. Dave Ramsey says that you should shoot to have a minimum of $1,000 and no debt then build up to 3-6 months worth of expenses.

I like to look at emergencies in varying degrees. You should always keep $1,000 in your regular savings account. That's the cash you'll need if the car breaks down or the hot water heater quits. After that I'd go for Suzy's advice--start working on your big emergency fund and shoot for the full 8 months. A big emergency, of course, would be losing your job.

Sure, you may be eligible for unemployment benefits, but note that the pay is significantly less than your salary and does max out. For a bit of a reality check go to Colorado Internet Unemployment Claims Benefit ESTIMATOR to get an idea of what your unemployment benefits might be. And remember, these benefits are considered income and therefore taxable by the IRS. So if you think you didn't need that emergency fund, maybe you are now thinking twice. Oh, and don't forget if you lose your job, then you've also lost your health benefits and will now have that added expense.

As part of your emergency preparedness take a hard look at what your expenses might be if you lost your job. Are there places you're prepared to cut or change? Could you:
  • Eliminate--cable or dish services, video and gaming rentals, gym memberships, etc?
  • Sell your some of your stuff?
  • Rent out a room?

You should always have a plan in place, just in case. Meanwhile, 8 months of expenses is still a big chunk of change. You can only do the best that you can do. Can you establish automatic transfers from your checking to another account? When it's automatic your less likely to miss it, but if that $100 sits in your checking account it's more likely to be spent unnecessarily. Instead of monthly transfers consider splitting your direct deposit, so you double your money quicker.

According to a poll by 4 out of 10 people don't have an emergency. These days you don't want to be one of the 6.

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