Importance of an Emergency Savings Fund

Lets face it, times are tough. Every little money saved can always go a long way.

Now imagine this happening:

1. Losing your job
2. Recession
3. An emergency happened (medical, fire, natural calamity)

Where will you get the money to pay for the bills?

Good willed people are always nice to have around undoubtedly, but you cannot always rely on that, and seriously if you did, have some shame on yourself. In times like these that an Emergency Savings Fund comes very useful. As the name suggests, it a fund for...yeap, emergencies. Regardless of your definition of what an emergency is, money saved for a rainy day is always a good idea.

Determining How Much ESF a Person/Family Needs

The process of identifying how much Emergency Savings Fund (ESF) a person or a family needs is fairly straight forward. Just add up the total expenses you or your family uses for a month then multiply that by the number of months you want to have an ESF supply for. For starters, people usually start with a three (3) to six (6) month worth of ESF. This timeline has been established since the usual reason for the use of an ESF is the loss of income and it roughly takes this amount of time to find another revenue source. All you need to do is to be able to clearly identify what expenses you need to take care of on a monthly basis and a good estimate to cover for those. 

Some of the expense categories to take into consideration (C):

• Housing Expenses: Rent/Mortgage, Utilities, Property Tax, Insurance, 
• Food Expenses
• Loans and Debt Repayment: Credit Cards
• Transportation: Car Loan, Fuel, Insurance, Maintainance, Emergency Repairs
• Personal Expenses: Haircut, Household supplies, Toiletries, Grocery, Clothes, Laundry
• Insurance and Health
• Other Taxes
• Cost to Find a New Job (in case the reason for the use of the ESF is due to job loss)

Now this list is not exclusive. Add as much or as little expense as you want depending on your needs just make sure that everything is covered.

Emergency Savings Fund Calculator

Just go to Google or Yahoo! and search Emergency Savings Fund Calculator and there you have it! Here is a link for one of them.

PNC Emergency Fund Calculator

Where to Stash Your Emergency Savings Fund

I personally think that the most important part of an ESF is its liquidity. A piggy bank might be a great idea for kids or early teens but keeping an ESF in cash is more probably than not, a bad idea (imagine a house break in, there goes your emergency fund to supposedly cover that emergency, along with everything else in the thief's pocket.) Here are some places suggested by Morningstar.

• Savings Account: Keep your ESF on a separate savings account to minimize the urge to spend it every time you check your usual account. Online bank transfers makes it accessible in the actual case of emergency.
• Money Market Fund: is a type of mutual fund that is required by law to invest in low-risk securities. These funds have relatively low risks compared to other mutual funds and pay dividends that generally reflect short-term interest rates. Unlike a “money market deposit account” at a bank, money market funds are not federally insured (SEC.GOV). The advantage of money market is that it "often pays as much as a percentage point more than banks' money-market accounts do." A person usually gets less than that if it was only saved on a savings or checking account.