Tuesday, February 22, 2011

Emergency Funds: Emergencies Happen When You Least Expect It

The year 2007 held such promise for us when it started, but by the end of the year we were brought to our knees.

As self-employed owners of a small business, we have lived through some tough months, but in 2007, it was a tough year. For a variety of reasons, our business became difficult that year. There were months when our sales were HALF of what we would normally bring in. Our monthly income must cover our business and household expenses and many months in 2007, our income barely covered our business expenses leaving nothing left for our household.

I remember one morning my husband and I were sitting at the kitchen table contemplating if we should sell one of our cars. It was a scary time for us.

What got us through...our emergency fund.
Had it not been for the money in our emergency savings, we would most likely have used credit cards to survive. We reduced our spending where we could, but the money to pay any shortfall each month came from our emergency fund. It was a life saver, a sanity saver and a marriage saver.

By the end of 2007, our business was picking up again and we were gaining some momentum, but not before we practically wiped out our emergency fund with only $2000 left to spare, not enough to get us through one more month.

We spent the next couple of years building our savings back up, but I am now thinking that it needs to be increased.

How Much Do You Need in an Emergency Fund?
Three months of living expenses? Six months? One year? Depending on our income source and stability and what we are comfortable with, that number might be different for everyone. Three to six months living expenses used to be what the personal finance experts recommended, but in today's environment, maybe six months to a year is more prudent. In 2007, we used about 6 months worth of living expenses and our savings came very close to drying up, so saving one year's worth of living expenses might be more wise for us.

What is considered an emergency?
Surely unemployment, reduced income or a business downturn is considered an emergency, but so is a leaking roof, a broken hot water heater, or a dead car battery. But a broken TV or the snazziest new phone or gadget...maybe not so much. An emergency fund is really a necessity account. Your wants and dreams are secondary and need to be saved for separately.

Should you impose strict rules on emergency fund spending?
Absolutely! Don't confuse this money with vacation money or new furniture money. It is not a spending account. It is for emergencies. Save it and forget about it.

Which comes first: saving for an emergency OR paying off debt?
Many personal finance experts believe in building an emergency fund to $1000 to get started and then pay off consumer debt. Once that debt is paid off then start building up you emergency fund to your desired number. I like this strategy, but I personally don't think $1000 is enough to start with. We spent that in one week last fall when our hot water heater suddenly broke and one of our vehicles needed four new tires to pass inspection. I think $2000-$3000 will give you more of a cushion to start with and less of a chance that you'll need to resort to a credit card or loan when a disaster strikes.

What happens when you have an emergency?
Take a deep breath, because with a well-funded emergency savings account, you're covered. BUT make it a priority to replenish the account as soon as you get your feet back on the ground.

Do you have an emergency fund? Is it enough to cover your emergency needs? Are you having a hard time saving for your emergencies? Let us know in the comments.

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This post is linked to Frgual Friday at Life as MOM.


  1. This is a great post. My husband and I have always lived close to the edge with 1 job, three children and a mortgage. There aren't many extras - no cable, etc. We've never had an emergency fund until now. You see, my husband lost his job in January. We are getting a little help from family, but not enough to help out if the car breaks down. So, despite having no income, I now have $500 in savings in case the car needs a repair. (At least the car is paid for.) I wish I had made more of an effort to build that fund. That will be my #1 goal when we are reemployed.

  2. As the owner of a small business it's advisable that you save up at least a year and probably more. Just for the reason you laid out. I didn't have a year's worth of savings and when my business went sour it took me with it. I've learned to be smarter. Good luck!

  3. We have an emergency fund and boy do they come in handy! Case and point: last year our furnance died and was never able to be revived again. We had to drop a few thousand dollars for a new, more efficient one and had we not had that money in reserves for "just-in-case" moments we probably would have been in serious financial trouble. We have such a tight income as it is and without emergency money or at least SOMETHING in a savings account, you are really setting yourself and your family up for failure.
    I believe getting at least $1,000 saved up before tackling debt is a good idea, too. Once we became debt free, we were then able to increase our emergency fund to cover 6 months worth of needs should my husband not have a job or become unable to work.
    As of this year we have stopped contributing to our emergency fund and began paying more on our mortgage as we are putting our home up for sale in March. We figure we have enough in reserves to stop temporarily and by paying more on the principle, we can avoid lossing our hindends if we end up owning at closing time.
    Thanks for such a wonderful post!

  4. Great post. I am still trying to establish an emergency fund. I know Suze Orman says eight months - that is a lot of money!

  5. I agree that $1000 is not enough. It is a great place to start, especially for someone who has never saved any money, but in reality, most of our emergencies are over $1000 each. It isn't going to last long.

  6. Thanks everyone for the comments and encouragement!

  7. I do not think that replacing the battery of your car is an emergency. Car repairs and house repairs should already be part of your budget.


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