Saving for Emergencies
If you listen to Dave Ramsey (not a bad idea!) you may have heard him talk about how having an emergency fund keeps Murphy away from the door. I like that way of putting it because I like to call the emergency fund, “Murphy Money.”
An emergency fund is a person’s most essential savings project. It is one of the first steps toward financial success.
Murphy and Money
You no doubt know about Murphy’s Law, the suggestion that anything that can go wrong, will go wrong. And of course there are the corollaries like the one that says that when something does go wrong it will be at the very worst time.
Fortunately Murphy's Law is not absolute! But Murphy’s Law does seem to apply often enough financially that it is not wise to ignore it; it will prove true often enough that precautions should be taken.
Murphy’s Law does seem to apply often enough financially that it is not wise to ignore it
Do not suppose that you are uniquely immune to Murphy. You are not. Neither is anyone else.
No one can anticipate every financial need before it arises. Consequently it is only wise to recognize that you need to be prepared when something unexpected does take a bite out of your pocketbook.
What is Your Emergency Fund?
Financial advisors disagree on many things, but almost everyone believes that people need an emergency fund, what I call Murphy Money, to deal with this problem. This is money, kept in an easily available savings account, to fall back on in case (or when) something goes wrong.
This could be money for anything from replacing an appliance that goes belly up or dealing with the loss of a job. The only common ingredient is that emergency expenses are those that come on unexpectedly.
The importance of an emergency fund can hardly be exagerated. Nothing discourages people from seeking financial success more than unexpected setbacks. When setbacks become irritations instead of disasters, they become manageable.
How Much Money for an Emergency?
A sizeable emergency fund, your Murphy Money, should be your very first savings. If you cannot fully fund it completely from the beginning set aside a smaller amount to start and slowly build it up.
Most advisors suggest an emergency fund of three to six months income; this is reasonable, but should be adjusted to reflect personal and world conditions.
Most advisors suggest an emergency fund of three to six months income.
In the midst of a recession with lots of people unexpectedly losing their jobs it is wise to increase the funds toward the maximum recommendation, or even a little more.
If you have no debts and a reliable income you may need less. But obviously it is better to have a little extra than not to have enough when it is needed
Where Should You Keep Your Fund?
Almost everyone seems to recommend that you keep your emergency fund in a simple savings account or something equally accessible. This is not a bad plan.
Certainly a reasonable amount of your Murphy Money needs to be immediately available. If your washing machine breaks down you want to pick up one today, not next month. A local bank savings account may well be the best.
But for a large part of your emergency fund when you have several month’s income put away, you may want to consider some other options. For example, a money market mutual fund at Fidelity or Vanguard may earn more while being reasonably easy to retrieve. It only takes a few days to transfer money to your local bank account with online access.
However you do it, no matter how poor you think you are, do have an emergency fund. Just having some money you do not spend will help you get in control of your money overall. And it will help you keep on track with all of your financial goals.
If you do not have an emergency fund now, open a separate account for your Murphy Money today. If you only have five dollars to put into it, do it. Just keep adding a little every payday until it is adequate for your needs.