Posted by Brian McCullough
There’s a series of things “they” always tell us to do: payoff your debt, never carry a credit card balance, fully fund your 401k and IRA every year…
One of the things “they” also mention is a rainy day emergency fund. How many of us out there are disciplined enough to have one of these? And I mean a real one… money set aside that you won’t breakdown and use as a down payment on a new car? Money you won’t touch unless you absolutely need it.
If you feel your job is in danger, this discussion is not completely academic. Depending on the data you look at, the average job search is 6-weeks to 3 months. Can your family go that long without your income? What if you need to purchase health insurance for the interrum?
Heck, even in the best of all possible world’s, any jobs search has the potential to break your bank. If you suddenly have to take a new job halfway across the country, do you have enough money to move your household over there?
There are plenty of different philosophies about an emergency fund. I guess the most fool-proof plan would be to set aside 3 months of income, so you know you’d be completely cushioned. But how many years would it take you to build up an emergency fund equal to 1/4th of a year’s salary.
Having a cash cushion of a couple thousands dollars is not outside the realm of possibility, however. And there are other options as well:
David Chilton writes: “I’m not against emergency funds, but I do feel that $2,000 to $3,000 is much more realistic than $10,000. If you’re afraid that an expensive emergency looms in you future, establish a $10,000 credit line at your bank.” Chilton believes most people have insurance to cover many emergencies, and $2,000 or $3,000 is enough to meet the needs insurance will not cover. In the meantime, if you need more, you can liquidate investments.
Notice the sentence in bold.
Actually, that quote is from one of my all-time favorite blogs, GetRichSlowly. If you have personal finance questions about absolutely anything, GetRichSlowly is the place to go.
Here are two of the best GetRichSlowly articles about emergency funds: