Another Post on The Emergency Fund

It was just one of those things. It could have happened to anybody. A little while back my wife got lost in a bad rain storm. It could have happened to me. On occasion I get lost. My wife left her cell phone at home, so she stopped at a mattress store and gave me a call. I quickly determined where she was and told her how to get home. She said she was going to wait until the rain let up. Fifteen minutes later I received a second phone call from a more distressed wife. She had locked the keys in the car and left the headlights turned on. I picked up the spare set of keys and drove the 40 minutes or so required to get to where her car was parked. Problem solved. The battery still had plenty of power to start the car. I comforted my wife and we drove home.

If someone has a spouse or a teenager with a driver’s license, this scenario is not a serious problem, just an irritation. If I was out of town, my wife could call a wrecker or some sort of roadside assistance company. I imagine that would cost $200 or more, particularly since it happened on a Sunday afternoon. That would be a kick in the pants, but certainly not the end of the world. But let’s say this happened to a single mom who worked at a minimum wage job. What if she put it on a credit card then couldn’t pay off the card? She would get hit with all sorts of fees and high interest charges. This simple little chain of events could wreck her finances for several months.

This is why an emergency fund is an absolutely critical first step to financial solvency. For whatever its worth, the emergency fund is number seven on my list of ten Basic Financial Rules for Young Couples.

Start a “rainy day” fund in a bank or a money market fund. The goal here is six months cash reserve (six months take home, both salaries). It will take some time to reach this goal. Don’t beat yourselves up about this but keep putting a little something aside every month.

I am not alone here. A thousand dollar emergency fund is Dave Ramsey’s baby step number one. Dave Ramsey’s baby step number three is a full emergency fund with three to six months take home salary. Suze Orman is even harder on the emergency fund issue than most financial teachers. Currently, the average duration of unemployment has hit an all time high of 37 weeks. Therefore, Suze Orman is calling for an emergency fund of eight months take home pay. In a change to her former teachings, she now considers the emergency fund a higher priority than paying off credit cards. A year ago, I put up a post based on an article by Liz Weston entitled, “Why You Need $500 in the Bank.” By the way, this minimal number matches Dave Ramsey’s suggestion for a family with a combined household income below $20,000 a year.

The numbers are pretty awful.

64% of households with incomes under $25,000 have less than $500.
38% of households with incomes between $25,000 and $50,000 have less than $500.
17% of households with incomes over $50,000 have less than $500.

And believe it or not!

5% of households with incomes in excess of $100,000 have less than $500 on hand.

Please, if you don’t have an emergency fund, start one today. Even a few dollars a week could save you from an unforeseen credit disaster.