Building an emergency fund equivalent to 3-6 months of personal living expenses isn’t just important, its critical in creating financial stability in your life.

I was fortunate to learn this lesson the hard way when I was growing up.  When I was a kid of about 7 years old, my parents divorced.  The divorce was a complete shock to my mother.  Because of that, she literally went into a state of financial panic.  From that day forward, anything to do with money was followed by her frantic response of  ”I can’t afford it.”  It didn’t matter what “it” was, she had gone into a state of panic because she felt totally blindsided and helpless.   These are what we call life’s “little events.”

Somehow and because this stress was so intense it literally burned in me the importance of creating financial independence.   This also ended up providing me with an intense desire to figure out this mysterioius relationship we all have with money.   I decided I didn’t want that kind of stress in my life.

You may have been taught that having an emergency fund is critical  for things like the brakes going out on your car, an unexpected medical emergency,  a job loss or even divorce.   All of these areas are important but they don’t speak to the core issue.

One of the ways I plan to differentiate The Wise Buck from other personal finance blog is to teach you the inherent danger in making emotional decisions when it comes to investing or handling your personal finances.   More to the point.  Stress is an emotion we’re all familiar with.  Whenever we don’t have any money in our rainy day fund, we not only become stressed out, our survival instincts kick in.  For those of you who have a healthy emergency fund, imagine if you woke up in the morning to learn that your financial institution was now defunct and all your personal savings were gone.  Do you think you’d view things a little differently?  Of course. Stress would be an understatement.

Stress can lead to anxiety.  If untreated it can lead to depression.  According to WebMD, 75%-90% of all doctors visits are for stress related ailments or complaints.

The message to internalize here is that whenever we’re under tremendous stress, we aren’t acting at our highest levels.  How does the emergency fund fit into the equation?  Whenever you have no personal savings, your survival is always being threatened.  Your thoughts are continually of the worst case scenario playing out in real life.  Contrast this with having at least 3-6 months of personal expenses saved inside your emergency fund.   In this situation your subconscious mind intuitively knows that no matter what, things will be taken care of.   Now you’re able to focus on more productive areas and pursue your goals.

Now that we understand the importance of having an emergency fund, lets look at the 2 typical questions of:

1. How Much

2.  Where To Invest

How Much

The conventional wisdom is to have an emergency fund to cover 3-6 months of your living expenses.  You don’t have to do this all at once.  If saving 3-6 months is too much to even consider, start with a goal of saving $1000 and increase it from there.  Remember, savings is a habit that requires discipline; so, the key is to get started now and increase your emergency fund to the point where you are comfortable.  For me that number is 24 months.  Yes, I am a bit more extreme than most.  But guess what?  I sleep a lot better than most people.  This is only because I know that if things completely fall apart tomorrow, I will have everything covered.

Where To Invest

Now that we’ve determined how much you should put away, we need to answer the question: Where To Invest?   Your emergency fund should be invest in the most safe and liquid assets.  These would include things like a checking account, rewards checking account and bank savings account.  The important part is your ability to access your funds immediately if you need to.

To find money  markets and savings accounts with the best rates in your area, check out CheckFinder or Bank Rate.

Some Final Thoughts

As I mentioned, I have my emergency invested in a FDIC insured, high interest checking account that is earning around 4%.  Now it’s your turn.  No more excuses.  It’s time you decided to take care of your emergency fund.  As I mentioned earlier, start with a goal of $1000 and build it to the point that you are comfortable, with a minimum of 3-6 months.

If you’re struggling with ideas of how to save, don’t. Here are 2 links that will get you started right away.

20 Ways To Cut Your Personal Expenses

4 Savings Habits

In closing, let me know if you found this article helpful by posting your comments and sharing your own expenses.

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