Emergency Funds - What You Need to Know

With the recent volatility in the finance world, now is an excellent time to learn about creating an emergency fund if you don't already have one.  An emergency fund is a stash of money that is ONLY to be used in case of a financial emergency.  Financial emergencies may consist of significant medical costs, job loss, home repairs, car repairs, or any other financial hurricane you weren't expecting.  

How much money should you put into an emergency fund?Many experts try to simplify the size of an emergency fund.  They usually recommend storing between 3 and 6 months of living expenses.  I think an emergency fund should be customized to the needs of each individual.  If you have disability insurance and a strong line of credit, you may need only a few thousand dollars in an emergency fund.  Alternatively if both you and your spouse work at the same company in a more saturated field, a much larger emergency fund may be important.  

Where to start?If you have not started an emergency fund, don't panic.  This isn't something you accumulate over night.  Saving up months worth of expenses will take time.  Set small goals and do whatever you can to reach them.  

In this economy, the best place to start is a high yield savings account.  Ally Bank and ING Direct are excellent places to start.  ING Direct has no minimum balance and no monthly fees.  If you decide to open an account with ING direct with an initial deposit of at least $250, let me know, and I can get you a $25 sign on bonus with them.  I haven't used Ally myself, but I have heard good things about them as well.  

I especially like internet banks like ING because they offer a superior savings account rate, and they do not give you a debit card for your account.  Without a debit card, you are forced to think twice before using money from an emergency fund.  

*Money in the stock market is not an emergency fund.  Depending on when you have an emergency, pulling money out of the stock market could leave you with substantial losses.  

In summary:
1. Decide how big of an emergency fund you need.  Everyone is different.
2. Don't touch the emergency fund unless absolutely necessary.  Only use it if your survival is threatened.
3. Use a high yield savings account.  Saving money in your large bank like WellsFargo is almost as bad as hiding it under your mattress because the interest rate they pay you is incredibly low.  Savings accounts won't make you rich, but they do help to teach you how to be wealthy