Emergency Fund and What is an Emergency

There are many different ideas about how big your emergency fund is as well as what it should be used for.  Which one is right and which ones are wrong?  Well, I believe that all depends on the individual.

Emergency Fund

An emergency fund is a fund used only in the case of an unexpected financial event.  We’ll talk about that later. How big should your emergency fund be?  Some people say that if your still in debt your emergency fund should be $1000.00.  They say to keep it this small so you can get it funded quickly and then get back on to paying off your debt using the snowball method (we’ll talk about that in a future post).  I actually belive that $1000.00 is a bit low.  The reason i say this is this,  a lot of unexpected financial emergencies could be more than this amount.  For example, car transmission goes out.  This could cost $1500.00 or more. Health issue;  most health insurance plans have a $1000 deductible plus 20% of the rest.  This can easily be more than $1000.00.  I suggest an emergency fund of at least
$2000.00.   Yes this will delay getting out of debt for a little while, while you fund the emergency fund but i believe it’s well worth it.  After you are debt free, except for you house, i suggest 3-6 months expenses as an emergency fund.  After you get you debts paid off take all you can and fund your emergency fund until you get 3 months of expenses in the fund.  After that begin to save for retirement while continuing to fund your emergency fund to the 6 month point.

What is an Emergency

An emergency is and unexpected event.  Some times people call expected events and emergency.  For example,  brakes on the car need to be changed, 10-year-old water heater quit working,  20-year-old roof needs to be replaced.  All of these are expected events and there should be a different fund for them (this will be discussed in a later post).  Car brakes and tires are only good for a number of miles so they are expected to be replaced.  The expected life of a water heater is 10 years so we can expect to replace the water heater in 10 years.  Unexpected events are just that, unexpected.  These are events that come out of left field and smack us in the face.
Dont let unexpected events cause you heartache and worry.  Get your emergency fund funded.