Emergency funds are an important piece of a sound financial plan. Personal finance journalist and blogger Kristin Wong learned the value of an emergency fund the hard way after college, when she was caught without one and had to scramble to pay for an unexpected car problem.
Wong, a staff writer for personal finance blog Get Rich Slowly, recently sat down to give us the 411 on emergency funds – what they are, what they’re used for and how much you should save.
At what age should you start building an emergency fund?
As soon as you’re old enough to take on the burden of an emergency, you should probably start building an emergency fund. If you’re a dependent, it’s probably not your priority. But if you’re old enough to have debt, expenses and a budget, an emergency fund should be part of your money plan.
For what type of emergency should you access your fund?
This is something every individual has to determine on his or her own. General guidelines are that an emergency is a life-changing event you cannot plan, like a hospitalization or job loss. However, some emergencies are less obvious than others. Maybe your car breaks down, but you find you can easily take public transportation while you save up enough to fix it. When drafting your budget and your emergency savings, consider your absolute necessities – the things you can’t live without. That should be a good starting point in deciding what qualifies as an emergency.
How much do you recommend someone set aside for their emergency fund?
Most experts recommend you set aside three to six months’ worth of living expenses, but it really depends on your financial situation. It’s kind of an ugly irony, but I think the more desperate your financial situation is, the more you should try to have in your fund. If you’re living paycheck to paycheck, even a small emergency can set you back. On the other hand, when you’re financially secure, an emergency fund might not even matter to you, as you could easily pull money from other places. The risk of investing that money might be worth it to you, because you have such a big safety net.
Does the amount you put away depend on the size of your family?
Definitely. An emergency fund is meant to cover your monthly budget if an unplanned expense should arise – and with a bigger family comes a bigger budget. Plus, when you have dependents, there’s greater risk of an emergency popping up. You might consider saving an additional amount for every dependent you have.
-From our friends at All State