Company layoffs, government shutdowns, medical emergencies or unexpected home repairs — life has a way of throwing expensive surprises at us. And since none of us can predict the future it’s easy to see the need for an emergency fund.

But beyond the ‘three to six months saved’ no one really has details on what should come next. So here are a few of the most common questions asked about emergency funds.

When should I save an emergency fund?

Your emergency fund is the buffer for preserving your financial situation. It’s what stops a bad situation from being a catastrophe, ruining all your efforts for financial success.

So when do you need an emergency fund? Yesterday. But if you don’t have one, then today is fine. Don’t wait for tomorrow.

You don’t have to have it fully funded, but you should have at least a bare minimum (we’ll talk more about this below) to get you started. That way, when the rainy day comes you aren’t washed away in the flood.

Should I save months of income, or expenses?

Start by saving to cover expenses, rather than income.

Saving several months of your income is unnecessary because, in an emergency event, you would likely lower many of your current expenses and hence could live off much less than your current income.

For example, if you lost your job today, would you still keep your cable bill? Would you still enroll the kids in swim class or eating out as much? Probably not.

So focus just on the basics. Figure out your bare bones monthly expenses – your mortgage/rent, debt, and basic utilities, then you can add in your regular monthly expenses after that.

How much should I save in my emergency fund?

The rule of thumb is to have enough to cover your expenses for as long as it would take to get a job if you lost one. For the average person in this economy, you could be looking at 6 to 9 months for a fulltime professional job close to your previous salary. For a freelancer, you want to save a little more if you can.

Now I’ll be the first to say, this is a lot to save. For many years I scoffed when personal finance personalities told me to do this. So I’m not naive to that fact. But to protect your family against the inevitable, you need a plan.

You can factor in other avenues for emergency funds until you get the actual fund up to snuff. Think of a big girl credit card (high limit, low-interest rate), home equity line of credit (HELOC) or Roth IRA that you can withdraw your contributions from tax-free.

What if I can’t save that much?

You want to start slow and work your way up as you find more ways to cut costs and earn more.

A great place to start with saving for your emergency fund is to have enough money saved to cover your car insurance deductible, and well as your health insurance deductible. So if your car insurance deductible is $500 and your health insurance deductible is $1000, then you’ll want to save at least $1500.

Both of those values are pretty easy to find out, and usually low enough to get you going on your financial journey relatively quickly. The idea is that you’ll have enough funds to get your insurance to kick in if you find yourself really sick, or damage the car you need for work.

This is a marathon not a sprint.

Where should I keep my emergency fund money?

There are a lot of options on where to keep your emergency fund money. Some suggest keeping it in the stock market, while other suggest certificate of deposits. But I believe an emergency fund should be stored in a high yield savings account that is earning interest that can keep up with inflation.

Your money won’t be growing with the market but it won’t be at risk either. I say this because, if an emergency happens when the markets are down, a lot of money will be lost when you make your abrupt withdrawal. Your initial $10,000 may only be worth $7,000 on the day of the emergency and you’ll be paying taxes on the earning too.

Certificates of Deposits typically don’t make good emergency fund spots, either. If the money is needed before the CD matures, expect a hefty penalty and lose some of your interest.

Another aspect that I firmly believe is keeping your emergency fund separate from your other savings/monies. If you keep your emergency fund in your regular checking account you run the risk of spending your emergency fund.

Checking accounts make it very easy to transfer the money, and once you start pulling money from the account, psychologically, it becomes easier to continue to take funds.

You should see your emergency fund as off limits expect in the event of a real emergency.

What constitutes an emergency?

Your emergency fund should only be used as a last resort where your physical or financial life is at stake. It’s meant for urgent, necessary and really serious situations like a job loss, an unexpected medical procedure or necessary repairs where you don’t have time to shop around for the best price or save up for it, or maybe even a critically sick relative or death in the family.

Think about it like this. If you’re in a car accident and needed emergency surgery, would you tell the ambulance to make sure they take you to the cheapest hospital or just take you somewhere to get you better? That’s an emergency.

If your father is about to have open-heart surgery and he lives alone 700 miles away, then the plane ticket to see him before he goes under would constitute an emergency. And even the cost to cover his nurse during recovery could also constitute an emergency.

It’s not meant to cover expected, but unprepared for activities – like forgetting a baby shower gift, or volunteering to buy pizza for work.

Are there alternatives to a cash emergency fund?

Of course, there are. But not all options are good ones.

You can choose to use your credit cards for emergencies – although that’s a bad idea since it’ll put you in debt and not everything (your mortgage for example) can be paid for with a visa card.

Some folks consider using a HELOC (Home Equity Line of Credit) as an emergency fund since the credit line usually has a lower interest rate – however, HELOC interest rates can change if it’s a variable rate, and they can be terminated by the bank at any time.

Not to mention that it’s putting your home at risk if you can’t make back the payments.

Your best bet is cash, but you can use the fund from a Roth IRA (Individual Retirement Account). Contributions from a Roth IRA are made with after-tax dollars and can be withdrawn at anytime, for any reason, and without penalty. But again, it’s money that would be in the market and it may have lost value when you need to withdraw the funds.

Does the bank matter?

It doesn’t matter if it’s a credit union, online bank or brick and mortar. As long as the account is FDIC insured and you can access the account, then it’s good.

I personally like online banks because they usually have the highest interest rates and are slightly less accessible than a brick and mortar bank. It usually takes about 3 – 5 business days for a transfer to clear so it gives you a ‘cool off’ period to think about if your emergency is really an emergency.

So how do I save for an emergency fund?

The first place to start is to automate your savings. The sting of losing money is a lot less significant if you take the money out before it hits your bank account. So setting up a direct deposit to save a specific amount every paycheck will do wonders for your savings account.

Another great place is to reduce your expenses. Take a look at your current spending and cut things that you don’t use or care about. So if you look at your last month’s bank statement and find that you are paying $20 a month for a cheese box which you never eat and don’t really like, then canceling the service and allocate that $20 to your savings account is a good start.

Any windfalls that you receive can also be used to pad your emergency fund – that includes, tips, bonuses, tax returns etc. And selling stuff or making some extra money are also good options

Time to take action

So now you know the basics. How are you doing with an emergency fund?

Do you have one that’s fully stocked? Are you working on getting it up and running? Or did you just get the skinny on needing an emergency fund?

If you haven’t started your emergency fund then now is the time. You have all the information you need to get started. What are you waiting for?

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