As self-employed owners of a small business, we have lived through some tough months, but in 2007, it was a tough year. For a variety of reasons, our business became difficult that year. There were months when our sales were HALF of what we would normally bring in. Our monthly income must cover our business and household expenses and many months in 2007, our income barely covered our business expenses leaving nothing left for our household.
I remember one morning my husband and I were sitting at the kitchen table contemplating if we should sell one of our cars. It was a scary time for us.
What got us through…our emergency fund.
Had it not been for the money in our emergency savings, we would most likely have used credit cards to survive. We reduced our spending where we could, but the money to pay any shortfall each month came from our emergency fund. It was a life saver, a sanity saver and a marriage saver.
By the end of 2007, our business was picking up again and we were gaining some momentum, but not before we practically wiped out our emergency fund with only $2000 left to spare, not enough to get us through one more month.
We spent the next couple of years building our savings back up, but I am now thinking that it needs to be increased.
How Much Do You Need in an Emergency Fund?
Three months of living expenses? Six months? One year? Depending on our income source and stability and what we are comfortable with, that number might be different for everyone. Three to six months living expenses used to be what the personal finance experts recommended, but in today’s environment, maybe six months to a year is more prudent. In 2007, we used about 6 months worth of living expenses and our savings came very close to drying up, so saving one year’s worth of living expenses might be more wise for us.
What is considered an emergency?
Surely unemployment, reduced income or a business downturn is considered an emergency, but so is a leaking roof, a broken hot water heater, or a dead car battery. But a broken TV or the snazziest new phone or gadget…maybe not so much. An emergency fund is really a necessity account. Your wants and dreams are secondary and need to be saved for separately.
Should you impose strict rules on emergency fund spending?
Absolutely! Don’t confuse this money with vacation money or new furniture money. It is not a spending account. It is for emergencies. Save it and forget about it.
Which comes first: saving for an emergency OR paying off debt?
Many personal finance experts believe in building an emergency fund to $1000 to get started and then pay off consumer debt. Once that debt is paid off then start building up you emergency fund to your desired number. I like this strategy, but I personally don’t think $1000 is enough to start with. We spent that in one week last fall when our hot water heater suddenly broke and one of our vehicles needed four new tires to pass inspection. I think $2000-$3000 will give you more of a cushion to start with and less of a chance that you’ll need to resort to a credit card or loan when a disaster strikes.
What happens when you have an emergency?
Take a deep breath, because with a well-funded emergency savings account, you’re covered. BUT make it a priority to replenish the account as soon as you get your feet back on the ground.
Do you have an emergency fund? Is it enough to cover your emergency needs? Are you having a hard time saving for your emergencies? Let us know in the comments.
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This post is linked to Frgual Friday at Life as MOM.