How to Set Up an Emergency Fund

“Most financial advisers recommend building up emergency savings equivalent to three to six months’ worth of living expenses… however, some recommend a fund to cover eight months’ living expenses.”
Emergency Fund?

Respondents (n=122) in Wi$eUp’s latest online poll have…

42% – NO emergency fund

26% – less than 1 month’s savings on hand

15% – 1-2 months’ savings on hand

7% – 3-4 months’ savings on hand

3% – 5-6 months’ savings on hand

7% – more than 6 months’ savings on hand

(http://wiseupwomen.tamu.edu/03-resource-center/polls.php)

The Wi$eUp poll results highlighted above illustrates a challenging reality for many families – NO or very limited emergency savings. Polls and studies reported in the media frequently talk about people being “a paycheck away from financial disaster.” Is it possible to be proactive and establish an emergency fund even during tough economic times? The answer is, yes, if you are able to make it a financial priority. That may not be easy when money is tight, but it is important.

Just what is an emergency fund? Your emergency fund is a reserve of money intended to cover basic living expenses IF you experience a financial emergency, such as losing your job or other sources of income, or having an unanticipated, catastrophic expense (perhaps a medical expense or a major household expense).

Here’s how to start an emergency fund…

• First, do the math. What are your “bare bones” monthly living expenses? That is, what is the least amount of money you would need to cover the very basics and not fall behind with your monthly bills? This amount is
generally less than what you actually spend on a monthly basis.

• Once you know the monthly fi gure, multiply it by three, six, or eight – whatever is your goal for how many months’ worth of living expenses you want to build up.

• Next, determine how much you can save regularly on a monthly basis.

• Then decide how long it will take you to build up your emergency fund. Remember, you do not have to fully fund your emergency fund overnight!


Example:

• “Bare bones” monthly living expenses = $2,100
• Emergency fund goal (3x, 6x, or 8x) = 8x
• Total amount needed to fund it = $16,800 (8 x $2,100)
• What I (we) can aff ord each month = $300
• How long it will take to build it up = 56 months
($16,800 divided by $300)
• In the example, 56 months may seem like a long time, but remember the money can be accessed for emergencies if needed during this time. And you can always alter your goal.

• Designate a special savings account to hold your emergency fund. Select an account that will accrue interest or earnings and is liquid (accessible when needed without penalty), but don’t make it so easy that you will “raid” the fund every time you need a litt le “extra.”

• For more information on emergency funds and set-aside accounts, check out

Chapter 5 – Savings Basics at Wiseupwomen.org