Managing Money God’s Way

A while back I blogged about the need to start an emergency fund.  Well today I wanted to address the question of “How big of an emergency fund should I have?”

A well funded emergency fund is the foundation of any solid financial plan.  Having funds stashed away for rainy days puts some distance between you and the financial cliff you could fall over at any moment, usually the result of a broken appliance, car repairs, or major medical.  Most financial planners and books recommend that you have 3 to 6 months of living expenses saved in an emergency fund.  However, I have found that this 3 to 6 month rule does not fit everyone or every situation.

Emergency Savings – Baby Emergency Fund

Dave Ramsey’s 7 steps calls for a “baby emergency fund” of $1000 be put into a savings account as the first step to financial freedom.  This is the plan my wife and I have followed.  We have $1000 set aside in an emergency fund at ING Direct.  We did this because it is harder for us to get to the money, and we earn a high yield on the savings account.  Don’t forget, if you would like to open an account at ING Direct, please email with your name and email address and I will send you a link that will get $25 deposited into your account.

How Large Should Your Emergency Fund Be?

That all depends.  To me, there is no magic formula for calculating how much should be in your emergency fund.  I am comfortable with $1000 being in there right now, but I would like a larger emergency fund down the road.  So the formula my wife and I have come up with is the following:

• $500 per spouse
• $500 per child
• $1,000 from the initial funding of our “baby emergency fund”

Following this formula we arrived at the $3,000 amount for our family.  Since my wife works outside the home, if I became unemployed we would still have her income.

Fully-Funded Emergency Fund

Once you are completely debt free (a step we are still working on) I recommend an emergency fund of 6 months of living expenses.  For most famiies this would probably be around $10,000.  Remember, this money is to only be used to pay for basic expenses in an emergency.  Mortgages, car payments, groceries, water, electricity should be included in this calculation.  Your gym membership or cable/internet bill could be canceled or put on hold during this time.  To the wise investor $10,000 may sound like an exorbitant amount of cash to keep on the sidelines, but just imagine the peace of mind you will have knowing you have 6 months of expenses just sitting there in case of an emergency.

Agree/Disagree with me?  Please write and let me know.

It has been a few days since I last posted.  That is because I am on vacation with my family at the beach for a few days, but I wanted to continue with my series on Dave Ramsey’s 7 Baby Steps.  Here are the steps we have covered so far:

• Step 1 – Emergency Fund – When It Rains It Pours
• Step 2 – Pay off all debt using the Debt Snowball Method

Baby step 3 build upon the emergency fund you established in baby step 1 and takes it to the next level.  In this step you are building a fully funded emergency fund of 3-6 months of living expenses.  The reason for so much money?  With this reserve you are building a safety net against major life events so that you do not have to go into debt again.

Once you have 3-6 months of expenses saved there are not very many things that can happen that you can’t pay cash for outright.  Lose your job, unplanned surgery, your emergency fund should have enough money in it to cover these expenses.

Why Bother To Build An Emergency Fund?

Many people think that this step is a big waste to build an emergency fund that is so large.  Why not use the money for something better?  I personally can think of a few reasons why this is a good idea.

1. Stuff Happens:  You will have things come up that are most unexpected and I think it is better to have planned for them than to just stick your head in the sand like an ostrich.  You will be glad that you have enough money to pay cash instead of having to whip out the old credit card and go further into debt.
2. Stress Management:  When you have an emergency fund saved, life is a lot less stressful.  You will not have to wonder how you are going to pay for something unexpected, you have the cash available to you.
3. Risk Is Reduced:  When you have an emergency fund, along with the proper insurance(s) you have a lot less risk of having a bad situation turn worse.  You manage the risk that comes along with those big negative events, and stop them from turning into life changers.

How Much Is Enough?

That decision lies with you and your family.  The amount may vary based upon your living situation, number of children, job stability and other factors.  Dave Ramsey speaks of a baseline of 3-6 months of expenses.  So if your family has a minimum of $3000 in expenses every month after getting rid of all the un-necessary bills, your 3-6 months of expenses would be between $9000 and $18,000.

Where Should I Put My 3-6 Months Of Savings?

Where you save your emergency fund is really up to you, but I would say you need to make sure that you can get to it right away if you need to.  My personal preference, and where we have our emergency fund is in a high-yield savings account at ING Direct.  Whatever you decide, DO NOT put your emergency savings into things like real estate, or the stock market that could be tied up for a while.  KEEP IT LIQUID!

So, my question to you is this:  Do you think saving up 3 to 6 months of expenses is enough?  To much?  Let’s discuss.

I am sure we have all heard that phrase “when it rains it pours” sometime in our lives.  But if you are like me, it seems to have happened more times than I would have liked.  Usually we say that because multiple things happen all at one time (car breaks down, dryer breaks down, etc) that cause us to have to use our credit cards to fix.  When I looked back at those times I realize it is because I did not have an emergency fund.

One of the questions I hear most often, and one I asked myself is “How much should my emergency fund be?”  The answer in just about every personal finance book you read or financial “guru” you listen to will tell you “Three to six months of expenses.”

But families do have a need for some savings behind them, whether they’re in debt or not.   As our Lord states in Proverbs 21:20 “The wise man saves for the future, but the foolish man spends whatever he gets.” If you’re going to break the cycle of credit-card dependence, after all, you will need to have some money available for Life’s little rainy day’s. Otherwise you’ll turn to that trusty credit card again and again. You’ll be just as dependent upon it as you ever were.

What you need is a “beginner” Emergency Fund.

The Beginner Emergency Fund

When it comes to “beginner” Emergency Funds, many people have found success with Dave Ramsey’s approach. I, too, am an advocate of his methodology.

In his “Baby Steps” plan, Ramsey advocates that folks start with an Emergency Fund of only $1,000. (Or $500 if you make $20,000 or less per year.) You should keep this amount in your Emergency Fund, and no more, until all your debts — other than your mortgage, if you have one — are paid off.  This is exactly what my wife and I have done.  If you want to read more about Dave Ramsey’s “Baby Steps” you can get the book here:

So How Large Should My Emergency Fund Be?

The bottom line is there is really no right or wrong answer to the question.  What we did was to put $1000 into our Emergency Fund and start paying off our debt.  Am I satisfied with that amount?  No, I will be adding to it after we have paid off all of our debts.  I will probably end up with around 3-6 months worth of expenses in the fund.  That is my comfort level.  Yours will probably be different.

Where Should I Keep My Emergency Fund?

This question is more important than you might imagine. If your Emergency Fund is too easy to access, you might be tempted to dip into it for things that are … well, not emergencies.

At the same time, though, it needs to be liquid (easily convertible to cash) and kept somewhere that allows fairly prompt access. After all, they call them “emergencies” for a reason.

So make an assessment of the banking and brokerage resources available to you. You’ll want the account to:

1. Pay decent interest,
2. Be devoid of fees,
3. Not be too easy to access, and
4. Not be too difficult to access.

A money-market account at a bank across town, or at a brokerage, might be the right fit. Perhaps a second savings account (usually not attached to a checking account) at your credit union or bank would work.

Or you could do what many, many savers are now doing: store your money at online-accessible banks like HSBC Direct, or ING DIRECT.  If you select ING DIRECT, please send me an email and I will email you back with a code that will get you an extra $25 dollars deposited into your account (Note:  I will also receive $10 for your referral).  Savings deposited in these institutions have historically paid much better interest than most other savings accounts, for one thing. Their minimum initial deposits are typically very low ($250), and there are no fees.

But most importantly: Access to your money is restricted … just a little. Once you make a transfer request, the funds generally can be wired into your current checking account and available within two working days.

Now, Just Fund it Already!

If you already have an Emergency Fund, how much is in it?  If you don’t want to share numbers, just tell us how many months of expenses you have saved up.