You’ve probably heard that you should have an emergency fund. Maybe you even have one already. But would it actually help in an emergency? Not just a minor emergency, but a serious one? The answer, for many people, is no.
Tips to Create an Emergency Fund (That Actually Helps in an Emergency)
The source cited is for this arbitrary figure is often finance guru Dave Ramsey, author of The Total Money Makeover. People seem to forget that the $1000 emergency fund is the first of several ‘baby steps’ that Ramsey advises.
Be Cautious with the ‘3 – 6 Months of Expenses’ Rule
This is a healthy emergency fund, but you need to consider it in the broader context of all your finances. What if your income isn’t meeting your expenses, and you’re already in debt? Then saving 3 or 6 months of income may not be sufficient.
You can’t insure against everything, which is why you need an emergency fund. But you need insurance too. Assess the types of emergencies you’re vulnerable to and insure against them.
Don’t Assume an Emergency Fund can Replace Insurance
Some people wonder what the point of an emergency fund is when they could just draw down on their regular savings if needed.
However, consider the nature of emergencies for a moment.
If you have an emergency and no money to deal with it, you’re going to have to go straight into more debt to pay for it. And that’s if you can even get more credit and access it immediately.
Do I Need an Emergency Fund if I’m Paying Off Debt?
EXPERT ANSWERS: Can I Afford to Begin Building an Emergency Fund?
Start Small : Start small and don’t get caught up in the bigger goal – first focus on starting, even just $25 a month (that’s how I started), then strive to have enough in savings to pay one bill for at least two months if you lost your job. - – Kelley Long, CPA/PFS, CFP®
I recommend reviewing three months of your credit card and bank statements, line by line. I know, this may hurt a bit, but you’re now aware of where your money has been going. - Maggie Klokkenga, CFP®, CPA