Strengthening Your Financial Core – The Emergency Fund

Cardio exercise and weight training are important components of physical wellness, and paying your bills, sticking to a budget and saving for retirement are all important components of personal financial wellness. But what happens when an unplanned emergency throws your financial life out of balance? What would you do if, for instance, you lost your job unexpectedly? Just like you build your core muscles to help maintain your physical balance, to protect against a financial imbalance, you should develop your “financial core” by creating an emergency fund to keep you going strong.

How Much to Save

Most experts agree that you should save between three and six months of expenses in case you were to lose your job. Loss of income is one of the most common reasons to use an emergency fund, so this rule of thumb makes sense if you assume you’ll be looking for work for three to six months. When determining how much to save, consider your individual circumstances:

• How many streams of income do you rely on? If you have multiple jobs or a working spouse, you may not need to save as much because the likelihood of losing more than one income stream at the same time is usually low.
• What kind of income do you rely on? Commission or freelance pay is more precarious and you should consider building a larger emergency fund.
• Can you predict any big expenses in the near future? Will an older car or appliances need to be replaced soon? Do you expect major home repairs or are you starting a family? If so you may want to start a savings plan now.

How to Succeed

Getting started on building your emergency fund is as easy as opening a savings or money market account. Decide how much you can contribute to it from each paycheck and stick to your goal.

Consider these tips for building your fund:

• Set automatic transfers so you don’t need to remember to do it every time you get paid.
• Think of your emergency fund as a monthly bill that you must pay to yourself.
• An easy way to start your account is with a tax refund, work bonus or other financial windfall.
• If you pay off a credit card or car loan, reroute the money you were using to make those payments into your emergency fund.
• Carefully define “emergency” to make sure you’re not withdrawing from the account unnecessarily.

Where to Keep Your Savings

Your local bank is a good place to start. You want your emergency fund to be accessible, but not so accessible that you are constantly tempted to use it. If you are concerned about being tempted to dip into your emergency fund too frequently, do not have a debit card or checkbook tied to your emergency fund. Just make sure your funds are liquid enough in case you need them.

Why It’s Important

You probably have insurance on your car, your home and your health. There are certain occurrences that you can’t insure against that can throw your finances out of balance, such as losing your job. That’s where the emergency fund comes in. Rather than relying on consumer debt with high interest rates, you can pay for unexpected emergencies from your savings. Additionally, you won’t have to halt debt repayment during a crisis because you won’t be taking funds from your monthly budget to pay for your emergency.

You can’t always predict what kinds of emergencies are going to cause an imbalance, and you can’t predict when they’ll happen. But you can predict that there will most likely be an emergency imbalance at some point, and you can prepare in advance by strengthening your “financial core” with an adequate emergency fund.