Managing the Unforeseen: The Emergency Fund

Emergency Fund is money your set aside in reserve in case there is an emergency or unforeseen things happen in your life.

Now, do you have any money set aside in a reserve fund in case there is an emergency in your life? Just thought I'd throw that question out to keep your attention.

So what's an emergency fund, you're asking? This is a fund to be used when a hurricane or a tornado blows the roof off your house, you lose your job, or your union calls a strike. The need could come in the form of a disability or an illness that keeps you out of work for an extended period of time, or it could be the immediate expenses of an untimely death in the family. You need to plan for the unexpected.

The experts agree that everyone needs an emergency fund, but they often disagree on how much you need in it. The conventional wisdom is to have at least three months' worth of living expenses set aside, and if you can do it, six months' worth stashed away is even better.

Three months of living expenses is not the same as three months of income. You need only cover the basics here. Take a look at your cash flow. What will it take to maintain your lifestyle, rent/mortgage payment, groceries, monthly utilities, childcare, insurance payments, and so on? That's the amount you'll need. If you are single or the sole breadwinner in a family, an emergency fund is extremely important because you don't have the luxury of a second income to cushion some of the emergency.

Now, the key is having the case available for you in an emergency, so where do you save or invest this money? A money market is a good place to out the money. Use a mutual fund money-market account with check writing privileges. A potential drawback here is that the minimum amount needed to open such an account is usually $1,000.

Now, I know what some of you are thinking: I don't need an emergency fund. I'll just use my credit card, get a home-equity line of credit, or borrow from my 401(k) plan to help me through the crisis. However, these may not be available to you during a crisis such as jog loss. Here is one place it is best to be prudent and follow conventional wisdom.