Emergency Fund
 The wise use of an emergency fund is one of the keys to successful money
management and will impact decisions on housing, debt reduction, insurance
coverage, and investment.
It doesn’t take long for most people to discover the need for some type of
emergency fund. It always seems to happen right when everything else is going
along pretty well. It looks like you are going to be a few dollars ahead this
month, and then something breaks down. It could be your refrigerator or washing
machine. It could be your car or something important to the maintenance of your
house. Whatever it is, you need to have some money set aside to take care of the
unexpected expenditures without being forced to borrow the money.
How much you need depends on the nature of your employment. It also depends on
your monthly expenditures. As a general rule, you need to have between three and
six months of your monthly expenses saved for emergencies. In addition, it
should be saved in a way that it can be easily accessed and in a form that is
not likely to decline in value.
If you are employed in a job where your income does not vary much from month to
month, you can probably go with a three-month emergency fund. However, if your
income varies a lot from month to month, for whatever reason, then you probably
will want to go with the six-month emergency fund.
A money market fund is the ideal investment vehicle to hold your emergency fund.
It is readily accessible simply by writing a check and pays some interest on the
balance that you hold in the account. More information on money markets is
presented in the unit, Bonds.
Uses of the Emergency Fund
An emergency fund can play an important role in money management. At the time
where a decision needs to be made, it gives you a choice of options that would
not be there otherwise. It allows you to implement a plan of financial
management without having to scrap it simply because your refrigerator quits
working.
Having an adequate emergency fund helps you in the following ways and saves you
money and effort when things go wrong:
- Because you have an emergency fund to take care of the small things that may
happen in your life, you can have a larger deductible amount on your home and
auto insurance. Small things that fall below your deductible will need to be
handled out of current income or from the emergency fund. But over time, most
people find if they add to the emergency fund—the amount they are saving on
insurance through higher deductibles—they will have more than enough to pay for
the little things that go wrong. Over time, as your emergency fund grows, there
will be adequate resources on hand to cover more than just the little things
that go wrong. Lower insurance costs will mean more money being available for
other things that are part of your overall plan.
- When it comes to needed purchases, an emergency fund can be used as a sort of
bank to avoid paying the interest that normally goes with purchases that are
financed in a conventional way. Say you need a new piece of furniture and the
one you find can be financed but will cost you interest. By withdrawing money
from your emergency fund, you can make the purchase and then pay yourself back
over the next couple of years like you would have done had you financed it. The
difference is that you will not be paying interest on something that is likely
to decline in value. You will be forgoing interest on the money that you pulled
out of savings, but over the long term you will come out farther ahead using
this strategy.
- In the normal course of economic life, people find themselves unemployed from
time to time. An emergency fund can be used during this period of time and ease
the pain as new employment is sought.
- There may be times when you will want to spend money out of your emergency
fund. There may be a significant budgeted expenditure that you need to make at a
time when some of your investments have suffered declines. You may have saved
for a long period of time in an investment form that was appropriate for that
time horizon, but now—when it is time to make the expenditure—you would much
rather spend cash and wait for the investment to recover before you sell it. An
emergency fund allows you to do this and helps you create more wealth in the
future by increasing your holding period.
The fifth principle of A Disciple’s Generous Response states that a disciple
saves wisely in order to create a better tomorrow for self, family, the church’s
mission, and the world. As has been indicated by the examples above, having an
emergency or reserve fund is critically important to prepare for the future.
WEB SITES
Information on Money Markets
http://www.practicalmoneyskills.com/english/at_home/consumers/saving/options/moneymark.php
http://www.investopedia.com/terms/m/moneymarketaccount.asp
Money Markets and Savings Account Rates
http://www.bankrate.com/brm/rate/mmmf_home.asp
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