Comments on: When Should You Use Your Emergency Savings Fund?

By: Mark

Mark — Tue, 05 Jan 2010 23:04:11 +0000

Interesting. You never see articles about when it is appropriate to raid the rainy day fund.

By: Sandra

Sandra — Fri, 25 Dec 2009 19:33:26 +0000

I was the original reader that ask nickel to post this topic. @ John people who make $20,000 can do this. That is what I make and I have come up with a plan to save a set amount out of my check every other week when I get paid. It is not much but I will eventually get there. I have also decided to put some of my tax refund up to do this. I have also opened 3 accounts at HSBC or some people even reccommend ING and 4 at my credit union so that I can separate my money for different purposes. I just started the check I got on yesterday, so I will let you know a year from now how it went. I am almost certain if I do my part by not touching the money, I will have $2000 of my own money saved this time next year. Just so you know we are on the right website for advice on financial planning, you may also want to check out frugaldad.com, greenpandatreehouse.com and suzeorman.com, kiplinger.com and cnnmoney.com I subscribe to all of these blogs and read them everyday and they are very informative.Sorry for the typos.

By: Matt

Matt — Thu, 24 Dec 2009 14:55:47 +0000

@Dan: Yes, right now the emergency funds are in a combination of short-term US Treasuries and TIPS index funds (volatility I am comfortable with). The next round of funding (2010) will be CD ladders set up in IRAs at my local credit union.

By: Dan

Dan — Wed, 23 Dec 2009 22:58:11 +0000

@H Lee D: I was explaining to my wife what our savings goals are (she’s a bit new to PF) and she asks me what the emergency fund is for. My first response was “Hopefully nothing” because that fund is basically a net in case I lose my job. (She’s not working yet.) Planned expenses (house down payment, car replacements, etc) come from a different planning source.

@Matt: Interesting strategy. I assume your emergency funds are invested in some sort of stable value investment? You wouldn’t want them invested in securities and then lose your job when the market tanked.

By: Matt

Matt — Wed, 23 Dec 2009 19:44:31 +0000

I subscribe to the guidance in the book “Why Smart People do Stupid Things with Money” by Bert Whitehead. We keep a cushion in our checking account equal to 10% of annual household income – this covers things like emergency car or home repairs. Emergency savings should be 20% of annual household income, liquid (cash, CDs, Treasuries, TIPS) and kept in tax-advantaged accounts (Roth IRAs for those who qualify). The emergency savings are only to be used if money is needed due to a loss of income (job loss, medical leave, etc), the theory being if you have to take out your contributions and gains, the gains will be taxed at a lower rate, due to limited income. I like this setup because there’s an extra step involved in obtaining the funds — they’re not just sitting in my bank account for whatever feels like the emergency of the moment. Obviously, this won’t work for everyone, and it does take time for most people to build up liquid reserves of 30% annual income (we’re still building).

By: FinanceDad

FinanceDad — Wed, 23 Dec 2009 17:22:25 +0000

I’ve based my emergency fund on how long it will take me to get a job. As an accountant and a professional – I could be out of work for 6 months to a year. So, I’ve built my emergency fund to cover expenses for a year. If something were to happen to a car, I’m tapping into excess reserves, rather than my true emergency funds. Good post, thanks.

By: Paul Williams @ Provident Planning

Paul Williams @ Provident Planning — Wed, 23 Dec 2009 17:07:35 +0000

My advice is to set your own boundaries for your “emergency fund” or whatever you want to call it. Then adjust your target amount accordingly.

If it’s going to replace your income if you’re unemployed (or not making anything if you’re self-employed), then figure out what is reasonable. Then if you’re also going to use it for car repairs, appliance repairs, etc. – increase it by a reasonable amount for those items.

No, it’s not as easy as just saying 3-6 months, but at least it will be more appropriate for your situation and your purposes.

By: Chris

Chris — Wed, 23 Dec 2009 16:37:43 +0000

If your income is too low for your monthly expenses than you are living beyond your means. People do this with incomes of 20k and with incomes of 200k. Building an emergency fund is even more important to those that are not “well off”.

By: John DeFlumeri Jr

John DeFlumeri Jr — Wed, 23 Dec 2009 16:15:31 +0000

If your income is too low for your monthly expenses, then an emergency fund is not possible. You’re really only talking to people who are well off.

John DeFlumeri Jr

By: H Lee D

H Lee D — Wed, 23 Dec 2009 14:55:52 +0000

Based on personal experience, I’d recommend 6 months. I was 31, healthy, in a very stable job when I was diagnosed with cancer. At the time, my benefits were great (they’ve since been hacked away) so that side of the financial piece wasn’t an issue, but I had no income for 7 months. (There were issues with getting short-term disability and by the time I was able to get that worked out â€” between chemo treatments â€” I was back at work. My lump disability check came later than my first paycheck when I returned.)

What’s the worst that will happen if you have extra? You won’t need it?

By: Daniel

Daniel — Wed, 23 Dec 2009 14:14:10 +0000

I think a lot of these “rules” are silly. A lot depends on your job security. 3 months of expenses may be good for someone with a fairly secure job, but for those in certain industries, 6 months might be much more important.

It also depends a lot on your mindset. The goal of the emergency fun is to cover you in case something happens, but also to give you the peace of mind that comes with knowing that should something happen, you won’t have to worry about money. In a real emergency, the last thing you want to think about is how you’re going to pay for it.