Preparing for the Worst: Evaluating Your Emergency Fund and Cash Savings
Sign up for our FREE Monthly Email Newsletter
In addition to keeping in the financial know, you may be interested in checking your credit score and report.
¹The credit scores provided under the offers described here use the Equifax Credit Score, which is a proprietary credit model developed by Equifax. The Equifax Credit Score and 3-Bureau scores are each based on the Equifax Credit Score model, but calculated using the information in your Equifax, Experian and TransUnion credit files. The Equifax Credit Score is intended for your own educational use. It is also commercially available to third parties along with numerous other credit scores and models in the marketplace. Please keep in mind third parties are likely to use a different score when evaluating your creditworthiness. Also, third parties will take into consideration items other than your credit score or information found in your credit file, such as your income.
²The Automatic Fraud Alert feature is made available to consumers by Equifax Information Services LLC and fulfilled on its behalf by Equifax Consumer Services LLC.
³Equifax Credit Report Control™ is only available while you have a current subscription to Equifax Complete Premier. Locking your credit file with Equifax Credit Report Control will prevent access to your Equifax credit file by certain third parties, such as credit grantors or other companies and agencies. Credit Report Control will not prevent access to your credit file at any other credit reporting agency, and will not prevent access to your Equifax credit file by companies like Equifax Personal Solutions which provide you with access to your credit report or credit score or monitor your credit file; Federal, state and local government agencies; companies reviewing your application for employment; companies that have a current account or relationship with you, and collection agencies acting on behalf of those whom you owe; for fraud detection and prevention purposes; and companies that wish to make pre-approved offers of credit or insurance to you. To opt out of such pre-approved offers, visit www.optoutprescreen.com/.
4We will require you to provide your payment information when you sign up and we will immediately charge your card $4.95. After that, we will charge the card $19.95 for each month you continue your subscription. You may cancel at any time; however, we do not provide partial month refunds.
Equifax® is a registered trademark and Equifax Complete™ Premier is a trademark of Equifax, Inc. © 2014, Equifax Inc., Atlanta, Georgia. All rights reserved.
Preparing for an emergency is an important part of financial planning and of your retirement strategy. One financial or medical emergency can wipe out years of hard work and retirement planning and retirement savings without an emergency fund in place to take care of expenses. Meanwhile, keeping cash savings means that you can access what you need whenever you need it—without paying the early-withdrawal penalties associated with investment funds.
How much savings do you need?
When meeting with clients, I always recommend that three to six months of your basic living expenses should be saved for emergencies. This will cover you in the event that you have a loss of income. It will also pay for an expensive emergency or two.
However, this is just the minimum recommended emergency savings. It should serve as the basis of your emergency fund and not the end of your savings efforts.
Two emergency funds
One popular method of saving money for a worst-case scenario is to have two emergency funds: a short-term fund and a long-term fund.
The short-term fund can be used for a fender bender or a major appliance that needs to be replaced. This fund can be a specific dollar amount, or you can save a specific amount per month in this account and watch it grow.
The long-term fund is substantially larger and can cover major issues like a hospitalization, lost income, catastrophic home damage, or other large expense. This amount may be tens of thousands of dollars—or more—in order to give you the best protection from financial disasters. Some financial experts recommend picturing three emergencies happening at the same time to help you determine just how much you will need to save in the long-term fund.
Living below your means
Because so many people live paycheck to paycheck, it can be difficult to save much money each month. And when money is saved, it may not seem to add up to much. To make the most of your savings, and to prevent an emergency from wiping you out financially, live below your means. Eliminate expenses wherever possible and be sure that your monthly income is substantially higher than your monthly expenses.
If you have a two-income household, this can mean ensuring that you can make it on just one of the incomes. This creates an immediate emergency fund if one income is lost. If you have a single-income household, keep expenses at least 30 percent lower than your take-home pay to allow for an emergency fund to be built quickly. If your only income is lost, you won’t be faced with foreclosure, repossession, and lawsuits if you have plenty of emergency cash with which to pay creditors until a new income is found.
The most important thing to remember about an emergency fund is that it should be used for true emergencies. Many people start a fund and then dip into it for incidentals, intending to pay back the borrowed money later. Keeping enough emergency savings requires a different mindset. Instead of seeing it as available money to use whenever needed, consider it untouchable money that will never be used unless there isn’t any other option.
Expert Retirement Advice: Bud Hebeler
Retirement Planning: Most Affordable Places To Retire
Investing Advice For Selling Your Gold
Investing in Company Stock: Pros and Cons
Beginning Financial Building Blocks
Jeff Rose is a certified financial planner and author of the blogs Good Financial Cents and Soldier of Finance. Learn more about his Roth IRA Movement that has inspired over 140 personal finance to educate young adults on the importance of saving.
Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.