7 Frequently Asked Questions About Emergency Funds

A few of the most popular questions answered…

Frequently Asked Questions About Emergency Funds

Emergency funds are an important part of every sound financial plan, and we keep telling you to form one for yourself. In a number of our money-saving articles, we even propose simple ways to create your emergency fund.

Since we received a number of questions in our mailbox, we figured what we wrote may not be enough for everyone. So we did the next logical thing — we came up with answers to…

7 Popular Questions About Emergency Funds

1. At what age should I start building an emergency fund?
The answer to this question is — as soon as possible. If you’re a dependent, it’s probably not your priority. But if you can take debt, you should also be able to start saving. And some of those savings should go towards your emergency fund.

2. For what types of emergencies should I access the fund?
Generally speaking, an emergency fund should be used ONLY for things that can’t be planned. These include life-changing events like a hospitalization or job loss. You will be tempted to borrow money from this fund, and it’s up to you to determine whether the thing you need the money for is an actual emergency or not.

3. How much money should I set aside for my emergency fund?
Most experts agree that a well-established emergency fund should have enough money to support three to six months’ worth of living expenses. However, the situation differs greatly based on your situation, with the irony being that the more desperate your financial situation is, the more money you will need in this fund. Cause if you’re well of, you could easily pull money from other places.

4. Does the amount I put away depend on the size of my family?
Yes – bigger families need bigger budgets. Simply put, those three to six months’ worth of living expenses are that much greater for families (than individuals). Also, when you have dependents, there’s a greater risk of an emergency popping up.

5. What are the differences between a savings account and an emergency fund?
You put money into a savings account for predetermined expenditures such as a new car or a new home, while the money set aside for an emergency fund is meant to be used for unexpected events. In a way, with an emergency fund you save for the sake of saving, all while hoping to never use that money.

6. What account type should I use for an emergency fund?
The general rule is to have your emergency fund money stored in an account that is easily accessible and FDIC insured. So it could be another savings account, you just have to make a mental note to use it for nothing but emergencies. This isn’t meant to be an investment account, though you may keep it in a low-risk certificate of deposit, or a money market account.

7. Can I use my credit card as an emergency fund?
Even though that’s not a good idea, many people are doing it. The main reason is that they don’t have an established emergency fund and swiping a credit card is pretty much the only thing they could do. There are credit cards offering a 0% APR for a number of months, effectively providing you with an interest-free financing, but you should be extra disciplined in order to benefit from that 0% rate. If you don’t make regular, on-time payments — you could easily end-up paying regular credit card rates and see your debt spiraling out of control. So if you don’t have to — don’t use your credit card to finance emergencies; instead, start building your emergency fund today!

Have some other question?

We’d love to hear from you and eventually expand our list… which we think should grow over time. So do send us an email or add you comment using the form below. We’ll ask around and try to provide you with an appropriate answer. Let’s start…

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