Emergency Fund

I am sure some of you have heard that most financial planners recommend to have an emergency fund that you can access in case of an emergency. Although buying a new pair of Manolo Blahnik does not qualify as an emergency, becoming unemployed or having your car break down can be a financial disaster if you don’t have any emergency cash saved.

Determine the amount you will need to save. The experts disagree as to how much you should have in your emergency fund – some recommending 3-6 months of living expenses and some advocating going as high as 6-8 months – but you should save whatever amount you are comfortable with. First, calculate your outgoing monthly expenses. Include rent or mortgage payments, utilities, student loans, car loans, credit card payments, groceries, day care, etc. Multiply that amount by the number of months you think you will need in case of an emergency. Now, this is the amount you will need to save.

Start small. Don’t get discouraged by the amount you need to save. The goal is to start small - – it could be as little as $25 per week or month. You can always trim your expenses and find that extra cash, just see some creative 22 ways to build your emergency fund here.

Leave it alone. Remember that this fund is for emergencies only, it is not to be used for anything else but for emergencies.

Make it automatic. Enroll in automatic deductions. This way, it will be automatically deducted from your account and you will never see that money, i.e. you will not be tempted to spend it.

Some good places to start with your emergency fund are:

Emigrant Direct

ING Direct

Save Yourself Account through Ameritrade and Suze Orman (Open a new non-retirement Save Yourself account at Ameritrade and make 12 consecutive monthly deposits of $100 or more, and Ameritrade will give you $100)

Roth IRA - I will write another post about Roth IRAs at a later date and will keep this short for now. You can use your Roth IRA in an emergency. Remember your contributions can always be withdrawn tax-free and penalty-free. However, your earnings (on your contributions) cannot be withdrawn – otherwise, you will have to pay the penalty. Also, if you do contribute to a Roth IRA, be aware that if you invest in stocks or mutual funds, and they go down in value by the time you have to withdraw your contribution in a case of an emergency, you will lose money. Therefore, if you are contributing to a Roth IRA that you also earmarked for emergencies, it is best to invest in some liquid safe investments, such as short-term CDs or savings accounts, etc.