Thursday, June 30, 2011

3-6 Month Cash Emergency Fund

If you have saved $1000 in an emergency fund and paid off all your debt except for your house using the debt snowball, then you are ready to move onto Dave Ramsey's Baby Step 3. 

This babystep is fairly straight forward. You want to pile up cash for 3-6 months worth of expenses. Remember, this is an emergency fund so you only need to count your necessary expenses. Utilities, Food, Mortgage etc. You probably wouldn't be worried about paying for cable if you were in a tight enough situation that you were using this fund.

Keep this money were it is liquid or very accessible. That means a money market or bank accounts. Do not use this money for investing. This money needs to be there when you need it.

There are a few factors to consider when deciding whether to do save 6 months of expenses instead of 3. 
  • Are you self-employed? (lean towards 6 months)
  • Is your income irregular? (lean towards 6 months)
  • How is the current job market? Right now with unemployment so high I would rather 6 months of expenses covered in case of job loss.
  • How is the economy in general? Does it seem stable? ie inflation vs. deflation, short food supply
  • What are some of the political plans being talked about? ie raising taxes, stimulus plans
For me, I'm more comfortable having cash for 6 months of expenses saved up, but anything is better than nothing. 

How are you feeling about the outlook of the economy right now? How many months are you going to aim for?

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