It is February and a time of the year when we ask these types of questions. Actually, it is a good question given the answer from Pop Culture Finance. Pop Culture Finance says you should have at least 6 months of income as a rule of thumb in your emergency account. Before I share my opinion, let's get one thing straight. An emergency fund is extremely important to prevent an escalation in personal debt. Debt is always the go-to solution when an emergency happens, you don’t have money saved, and you have to pay for it.
If you are intentionally saving, you are carrying out an important financial habit. I just want you to take an additional intentional step and give your emergency fund a purpose. What are you saving for?
Here are the categories that I would consider:
Healthcare – The idea is to be able to save for total out-of-pocket expenses for a family. That might be too big of a goal from the start. However, funding for a couple of deductibles is a great place to start. What does that look like? Say your deductible is $3,000 per family member. I would have a target goal of at least $6,000.
Car Repair – I would save between $3,000 to $5,000.
Home Repair – I would save between $5,000 and $10,000.
Miscellaneous – I include this because something unexpected always seems to rear its ugly head. This would be a true emergency category – the unexpected. I would save around $3,000.
What if you don’t save at all outside of a retirement plan? I would make it a priority. Of course, this is general advice considering I don’t know your specific financial situation. I would go as far as switching my monthly savings from a 401 K plan to a savings account. Obviously, take advantage of any employer match – that is free money. However, any money above the match should be saved for the short term. It has never made sense to invest for the long term when you don’t have the short-term taken care of.
Bob Brooks is the host of the Prudent Money Radio Show heard every weekday from 3:00 PM - 3:30 PM on FM Radio 91.3 KDKR