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PallaDinero

Personal Finance, Budgeting, Retirement, Student Loan & Lifestyle Advice and Commentary

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Emergency Fund

Emergency Fund

May 5, 2017 by palladinero Leave a Comment

Saving money for a rainy day is a tenet I have heard since childhood. I always saved any money that I got for Christmas, my birthday or any graduation. I would often save to buy a video game or a movie, so I didn’t spend it on anything important or extravagant, I guess I’m still the same way.

I think saving extra money is necessary, however, I am not a big believer in having a large emergency fund. What is the difference if you keep money in a savings account and then having a substantial amount that is strictly labeled as a dedicated “emergency fund”. You may fall into the trap of never touching an extra $10,000 when you can invest that into a home or your retirement.

What I do recommend is a smaller emergency cash fund kept in your house or apartment. A car repair, blackout or any other emergency are reasons to have cash on hand. Bad and unexpected things happen all the time and we need to be prepared.

Wakeup Call

During Superstorm Sandy my neighborhood was without power for several days, so stores only accepted cash for purchases. Fortunately I had a few hundred at home so I didn’t have to worry about money that week. A few years prior would have been bad news for me. In my early 20’s I would only keep about $20 at home, which was not a smart idea. I never thought about bad things happening to me or my neighborhood. But that’s a typical mindset at that age.

How much do you need?

If you do not have a car and rent I would recommend $500. That should be more than enough to cover food, local transportation, clothing and supplies for a week.

If you own a car or a house I would recommend $1,500 because, as some of us know, car repairs can be costly and it helps to pay in cash because it may be cheaper. And this amount will allow you to at least put money down so that the mechanic will start working on your car. This will also work with home repairs. Also carpenters, plumbers and handymen will start work if you give them cash as a show of good faith. 

Rules to adhere

Sock away a minimum $100 a month until you reach your goal. And remember that this fund is only for an emergency and not meant for weekend fun. Should you ever have to use the money for an emergency, remember to replenish it. At this time you should kind of think of it as a company petty cash, which needs to be replenished to ensure that it’s fully funded. Again, put at least $100 a month back into it until fully funded.

The amounts that I mentioned can and should be adjusted to your individual needs. My recommended amounts might be too low or too high for some of you. I believe this is a reasonable amount to have and fully understand why people do keep larger funds. But I am not convinced that is the best way to go about it.

When did you feel the need to have an emergency fund? How did you calculate how much you need?

Mike

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Budgeting Tagged: Budgeting, Emergency Fund, Home Ownership, Rent, Renting, Savings

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