How to Save an Emergency Fund

What is an emergency fund? An emergency savings account holds cash aside for the purpose of providing insurance in the event of an unexpected financial crisis.

The cash must remain liquid (immediately available) so that you will be able to minimize damage when disaster strikes. Keeping the money in a standard Money Market saving account is always a good choice as the funds are liquid and will also be earning compound interest.

The most common question regarding an emergency fund is, "How much money do I keep in this account?" The answer will vary depending on the amount of your monthly expenses.

To consider your emergency account to be "fully funded" you should save an amount that will cover a minimum of three months worth of expenses - preferably, the account will have enough to cover up to one full year of expenses.

There are four key areas to keep in mind when determining how much to save in your emergency fund, these four areas include:

1. How many incomes are within the household? - if you have more than one steady income then your risk of financial disaster is lessened.
   Related Coverage

   • How to Create an Emergency Fund
   Creating an emergency fund is vital in todays sad jobless economy. Do you want to have some money in your bank account for "those emergency expenses"? If so, read on and learn some steps for a more enjoyable life.
   • Emergency Fund - Start One
   In these tough Economical times, you cannot afford to run out of money when an emergency hits. If you are always worrying about money, then it is time to start saving...
   • Simple Steps To Setup An Emergency Fund
   It is essential for families and individuals to save money. Get into the habit to put aside some amount as a part of saving every month. It is better to start with small amounts and later try moving to bigger amounts.
   • 4 Steps to Building an Emergency Fund
   Here are four great tips to get you on your way to creating an emergency fund for rainy-day savings.
   The more sources of income you have the better. Diversity of income helps to protect you against financial crisis when one income is suddenly postponed or eliminated.
2. How many people are in the household? - if you are single, your risk is reduced because you will most likely have a lesser number of financial obligations outstanding. The larger the family, the more you will want to save in your emergency account.
3. How secure is your job/career? - if you work in an industry that often experiences layoffs or downsizing, your risk of job loss is greater. If your occupation is more specialized and less volatile then you may be at a lesser risk of losing your position. The greater the risk of layoff or job loss, the more you should be saving in your emergency fund.
4. What level of personal assurance do you need? - this is a question only you can answer. If you are someone who is not averse to risk, then you may feel comfortable saving a lesser amount in your emergency fund (no less than 3 months of expenses). However, if you are going to sleep better at night knowing that your emergency fund has enough available to cover 9-12 months worth of expenses, then you are encouraged to save that amount.

Your emergency fund is basically an insurance policy that is self-funded. You are saving for a rainy day, because at some point - it IS going to rain! Life happens, things change, tragedy strikes - and in order to be prepared for the unexpected you must start saving now.

Remember, your emergency fund should be strictly used for emergencies only. This account should never be used to pay for luxury items such as a new car, boat or family vacation. Use the funds only for emergency purposes.

When crisis does occur you'll be prepared - and that is a gift that is priceless, your loved ones will forever be grateful.