Financial Planning how much should to keep in an Emergency Fund Importance of an Emergency Fund

It seems to be some kind of cosmic law that a financial emergency will inevitably occur either when you can least afford it or after you have gotten some sort of bonus clearing it away like a pit boss at a casino. That disheartened feeling of dealing with a pending emergency and the looming question “How am I going to pay for this?” can be avoided with some pre-planning with the creation of an emergency fund.

Should I have an emergency fund?

The answer is yes! It is not a matter of if an emergency will occur but when, where and how much? Car accidents, expensive repairs, medical emergencies, lay-offs or drop off in business are all common incidents in life. For these types of events it is good to have money in a high interest savings account to be accumulating money and easily available to access in an emergency situation.

Those who plan ahead may be able to avoid a negative spiral of consequences that may happen from one bad incident. For example a person who is involved in a car accident and doesn’t have enough money for the deductible can be stuck with a car is not able to be driven to appointments, to pick up children from day care or to go to work. This may cause employment issues and other stress. If a person loses their job for not being able to get to work then they may face bankruptcy or eviction if they can’t pay the rent. All of this can be avoided with an emergency fund to rely on in such instances. 

How much should I have in my emergency fund?

There are many different schools of thought about how much should be in an emergency account and there are different financial realities that people live with that can make the decision for them. Things to consider when deciding how much should be in an emergency fund are:

*How much is left over after household expenses are paid?

*What are the deductibles required for the various types of insurance policies held for example auto, health, and household?

*What amount is needed to cover household expenses for three to six months possibly one year?

These questions can help to know what amount may seem reasonable to put aside in an emergency fund. has an emergency fund calculator spread sheet that calculates a recommended emergency fund amount based on several factors including Income Volatility Score regarding how steady income comes in to the household and Income Commutability Score which estimates how long it would take to get another employment opportunity in case of layoff or other unforeseen employment loss.

Where should I keep my emergency fund money?

Where to keep emergency fund money requires some honesty about discipline and spending habits. The old cliché of the coffee tin full of dollar bills on the fridge works for some people. There are other folks who would find that access to cash too tempting and for them an account that requires more thought and effort to access it may be a better choice. There can be a keeper of the fund the person in the family best suited to determine whether it is an actual emergency or a desire that would best be paid with another financial source. It is a very personal choice that each individual must make where old adages such as “Know thyself” and “To thine own self be true” come into play to some extent.

An emergency fund helps to mitigate the stress and possible cycle of debt caused by the common mishaps of life. It prevents the need to use high interest undesirable options like payday loans. Emergency fund money gives options that create solutions and that give peace of mind. How much is that worth? People who do not have emergency funds say they cannot afford to have them. The truth of the matter is a person can’t afford not to have one. Emergency Fund Calculator