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.