Say you’re like me, you own a car, and your hood release lever doesn’t work.  I have several options to fix the car.

1.  I can try to fix it myself and risk breaking additional things.

2. I can go into debt to have someone else fix it.

3. I can access my emergency fund.

So what do you do in this situation?  Sooner or later that car’s getting paid for, so I take cash out of my emergency fund (my mechanic has a discount for cash for some reason that I won’t go into detail about here) and I pay the mechanic to fix it.

The big debates on emergency funds

First of all, most financials encourage people to have emergency funds.  I am not sure if this is because they care about the people or just want a large sum of money on deposit with them.  My guess is that it’s the second reason but they publicly state the first.

When you talk to financial planners though, some say to pay off your debts with the emergency fund and used the paid off (usually credit card) as a new emergency fund.  Now if you’re the kind of person who freezes their credit cards in gallon bags, this is a great strategy because you have to think about whether or not it’s really an emergency.  (microwaves will ruin the card so no defrosting here)  You also have the satisfaction of paid-off debts, and greater freedom with current income.

 Then there is the how much question.  Some emergency funds are 6 months’ income.  Occasionally you find one that’s a year’s income, the vast majority fall somewhere between $1,000 and 3 months’ income.  My personal opinion is that you should set your own goal based on how much you seem to have emergencies.  For me, very few things count for emergencies so my emergency fund is only $1000.  However, my wife and I would like to have children, so we have a goal of $10,000 to use as an emergency fund in that case.  $10,000 is just an arbitrary number for us though.

Where do the funds for emergency funds come from?

  • Transfers from other accounts
  • Direct deposited checks (we have 10% automatically go in there)
  • Checks for birthdays and holidays (I put any money I get from relatives in there, my wife puts some)
  • Interest

Right now our emergency funds are in a savings account, since it’s linked to our ATM card, but once we hit the higher interest tier on our savings, the funds will be moved into a new money market account that should pay a much higher rate of interest.

As always, we love to hear from the people who read this blog, we will happily answer questions or even debate with you.  What is your opinion on emergency funds?