An emergency fund is critical to your well being

cash-stashIt’s amazing how many people have boats, nice cars, big 42 inch flat screen TV’s, or other frivolous items yet they have no emergency funds in case of a layoff or some sort of medical emergency or other financial disaster. This is especially concerning when they have children who depend on them. They simply rest assured knowing they have credit cards to fall back on. That’s not a smart idea, as you’re setting yourself up for failure if something bad was to happen. Not to mention, credit card companies are now limiting and restricting or closing accounts for even the best cardholders. What would you do if they shut off your cards and you were out of a job or had some other financial disaster?  Below, we will look at why you should consider starting an emergency fund, and how much you will need to have in order to have true peace of mind in knowing if something bad happens, you will be able to whether the storm without accumulating massive debt or worse forcing you into bankruptcy.

Less than half of Americans have an emergency fund, and those that have been sensible still might not have enough.  If something bad were to happen (and don’t be tricked into thinking this recession is over as companies and banks are still failing and unemployment is still on the rise) and your credit card company decided to terminate your account, would you be able to even meet your monthly needs? How well would unemployment cover your needs for the essentials like housing, food, etc.? How much money would you need to fill the gap and for how long?

A good rule of thumb is to expect it to take around one month per $10,000 you earn to find a job. So say you make $100,000 per year, you could expect it to take up to 10 months to find a comparable job. 10 months is along time without income, and could destroy your financial position that you’ve potentially accumulated over a lifetime. In Missouri, unemployment pays at most $313 per week (without taxes taken out), that amounts to between $1250- $1565 per month. Not much at all for someone trying to maintain a lifestyle they’ve become accustomed to. Not to mention ,this is unemployment for only the top earners, people who make less, will get less, much less in many circumstances.

In calculating your emergency funds needs, you must first figure out how much money you will need to fill your gap if you were laid off as it relates to finding another job and meeting your current obligations. In addition, it makes sense to stash away side money on top of that amount for other emergencies like car repairs, leaky roofs, replacing a hot water heater or A/C, or some other inevitable issue. Unemployment typically only lasts 6 months to boot.

So for our example above, a $100,000 earner with monthly bills of $3500, would want to have an emergency fund of ((3500-1200=2300)*(6=$13,800) + (3,500*4 =$14,000) + ($5000) = $32,800 if being conservative, or at minimum * (3500-1500=2000)*6=$12,000 + 3,500*4= $14,000)+$2,000 or $28,000) if considering the minimum. In essence, calculate your monthly bills, determine how long it will take you to find a job, subtract out unemployment proceeds for 6 months, add an extra fund for other emergencies that may occur in the meantime, so if something does happen your not forced to take from your other emergency (lay off) funds and figure out how much you’ll need. Open a savings account where you can earn interest on your money – and begin adding funds as fast as possible. It may take you a while, but it’s better to start now than never and you can finally get that peace of mind you’re hoping for.

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