The Five Things You Need To Know About Emergency Funds

To any financial question, there are two different answers. There is the textbook answer and the then there is the answer that works best for you. The textbook is the standard answer or the ideal answer. Remember that everyone’s financial situation is uniquely different. Thus, you can use the textbook answer as the starting point. Then move from there.

The textbook answer for funding emergencies is six months of salary. However, you might not need a full six months of cash sitting in a reserve. For some of you, that might be too much. For some of you, that might not be enough. Here are five things that you need to know when it comes to handling emergencies.

1) Unemployment - Determine the minimum amount that you need to get by on. That is the amount of money that you need monthly to cover the bare minimums. That would not include saving money, eating out, entertainment, etc. It would just be for the absolute necessities. Think through how long you would want to give yourself to find a job. Multiply the two numbers and then subtract any money that you think you would get from unemployment insurance.
2) Disability – Disability insurance comes in short-term and long-term. Most employers have disability insurance as part of an employment package. Take a few moments and familiarize yourself with the benefits. Know how long it pays out, determine the amount it pays each month, and finally know exactly when it starts. From a short-term standpoint, we want to know the gap if any between the day the disability occurs and when benefits start to pay. You will want to know that you can bridge that gap through an emergency fund.
3) A Bare Minimum - Have a minimum of $2,000 to $5,000 for those every-once-in-a-while big expenditures that pop up. It could be anything from your car breaking down, something needing to be replaced at your house, or paying a health insurance deductible.
4) Emergency Fund or Debt - Always liquidate the debt first. If you are paying down on a credit card, you can always borrow that money back in the event that you need it. The best case scenario is that you pay the debt down and don’t need the cash.
5) Emergency Fund or Retirement – Contrary to popular thought, I would select emergency fund. You can get that taken care of in a reasonable amount of time. Retirement will not matter if you have an emergency. Emergency funding should take precedence.