Everyone knows that an emergency fund is necessary for financial success but what not everyone knows is that creating an emergency fund is more than just putting money away.

One of the most important things to realize is that you should have more than just one fund and that they should all vary in size.  There is no such thing as a one size fits all fund that will meet the needs of every person trying to save out there.  The first emergency fund needs to fit in your wallet, literally.  I always keep a 20, a 10, and a 5 in my wallet at all times even if I do not plan on buying anything because I would rather use cash than have to rely on credit in case something comes up.

A Piggy Staying Home

If you find yourself having more money in your wallet than you could possibly need in a daily emergency, then it becomes time to save cash at home.  This emergency fund that stays home all the time is the overflow from the daily cash you take with you outside of the house in your wallet.  Ideally, this home emergency fund should cover most of the bigger expenses that might be incurred like buying new tires for the car or maybe a parking ticket that needs to get paid.  It is basically there in the house to not be too liquid that it burns a hole in your pockets but is still accessible enough in a real pinch and can be deposited to your account the next day if need be.  But if this fund gets too big then it should spill over to a place that is not as accessible and maybe someplace where it might actually earn some interest.

Another Piggy Went to the Market

Money market accounts that is.  Or maybe even a CD.  Putting money in one of these vehicles will give you a small return but the trade off is that your emergency fund is with the bank and it is not as liquid as the first two funds.  This encourages you to really think and assess if something truly is an emergency and whether it is worth the penalty fees to take your money out early.  However, if liquidity is a real concern then you can ladder your CDs to mature one month at a time.  That way you will always have money handy every month just in case and you have the option to get another CD or take the money out completely.

It is recommended that this particular emergency fund be at least as big as eight to twelve months worth of expenses.  But with the economy so unpredictable and the job market so thin, then it might be wise to have a little bit more than that.  Maybe a little bit more than an entire year’s worth of expenses.  That way a job loss can be survived even if the hunt for a new one lasts more than the unemployment benefits.

And if you manage to save a year’s worth of expenses then please share your tips and secrets because that is pretty impressive.

(photo: bootbearwdc)

If you enjoyed this post, make sure you subscribe to our RSS feed!

Related Posts:

1. Money Talks–CHAPTER 4 (HAVE YOUR CAKE AND EAT IT, TOO)
2. Let’s Play A Game
3. Motivation