With all the emergencies in the news lately – both from natural disasters and economic problems – the thought of a financial crisis within your own home may have come to mind.
The best time to prepare was yesterday, but the next best time to get started is today.
So, what stands between your family and major financial trouble?
Hopefully, it’s not just a credit card or a home equity line.
Trust me, we know it can be tough to “get ahead” enough to think about opening a bank account and putting away money specifically for an emergency.
But it’s vital that we prepare for those inevitable rocky times that lay ahead. After you get an emergency fund in place, you’ll be ready to face those costly home repairs, unexpected medical bills and periods of unemployment.
You won’t like it when an emergency strikes, but you’ll be prepared and ready to cover the financial impacts without resorting to debt.
As a general rule, most families should have approximately 3-6 months worth of expenses in an emergency fund.
It’s important to understand that this not 3-6 months of income, and it’s not inclusive of all the money you spend in a typical, non-emergency month.
To calculate an appropriate amount, go through your budget and decide on a line-by-line basis whether each expense is something that you’d need to cover if you were faced with unemployment. Once you have that monthly “bare-bones budget” amount, multiply it by a factor of 3-6 and you have your goal.
The 3-6 month time-frame will allow most people to regain meaningful employment if they are faced with a job loss. While unemployment isn’t the only potential emergency out there, it’s certainly a relevant threat for most people and this amount of savings will also cover most reasonable “expense” emergencies that you may face.
So, should you save 3 months, 6 months or something in between? Well, your personal amount should be based on your exposure to risk as well as your risk tolerance.
If you have two stable jobs and a fairly “calm” life with little volatility in your expenses, then 3 months is probably sufficient as long as that amount makes you comfortable.
On the other hand, if you are a one-income family with lots of little kids around and you feel like trouble is always lurking, you should shoot for 6 months of expenses. At the end of the day, it’s a judgment call.
Once you have a nice emergency fund stashed away, you may wonder just when you are supposed to take money out of it. Well, you don’t want to tap into your emergency money unless you have an actual emergency that you couldn’t foresee.
For example, regular home maintenance should be part of your budget and not something you need to take from your emergency fund to pay for. And you know your car insurance is due each year, so that’s not a good use of these funds.
On the other hand, you can’t plan for a broken leg or a job loss, so when you have a true emergency, tap into your account and feel good that you are prepared.
Once you get your full emergency fund in place, you’ll probably want to move onto investing, paying off your mortgage and meeting some other financial goals.
If (or when) you do encounter trouble and you have to take money from your account, you’ll need to pause these other goals temporarily and redirect your “extra” money each month back into building your emergency fund until it’s back to your comfortable level.
If you’d like more information on building an emergency fund or the several other financial planning steps we recommend before you get started, please check out our full Married Money Management series.
It won’t be easy, but the feeling of security and freedom that you’ll get by building an emergency fund will bring new levels of peace to your marriage.
Dustin Riechmann created Engaged Marriage to help other married couples live a life they love (especially) when they feel too busy to make it happen. He has many passions, including sharing ways to enjoy an awesome marriage in 15 minutes a day, but his heart belongs with his wife Bethany and their three young kids.