Why an Emergency Fund?
There are many events in life that cannot be planned for. Let us consider some examples:
- My close friend used to work for a company that closed down without a hint as to this event happening. This happened when the market was in the dumps…but he was able to ride through it because he had some money stashed up. It was not that he planned to have an emergency fund..it was just that he was not financially aware on what to do with that money.
- My colleague at work had mom continuing to stay in another (home) country. Mom was suddenly diagnosed with a fast acting cancer. My colleague dropped everything and left to take care of mom. Mom lived for another 6 months, but she got to spend the last 6 months with my colleague and died in peace. If my colleague did not have an emergency fund, my colleague could not have afforded those 6 months without pay…6 months that gave my colleague peace for the rest of life.
- One of my other friends lost a job unexpectedly. His company was doing okay, but they canned his entire product line. He was given two weeks to search for a job inside the company, but it was a time of job freezes every where and he could not get any. Since he had two kids, the COBRA insurance payment for the entire family turned out to cost almost 1900+ dollars! This was a total surprise to him as well as me. Did I say that rent is expensive where I stay? His total monthly expense was almost $5000 per month. He was out of a job for almost 6 months and that is 30 grand right there.
So, for reasons like the above, I wanted to have an emergency fund that will at least give me and my family some months without pay in the event of any emergency. This is especially important since we do not have any relatives or friends that can support us financially.
Size of the Emergency Fund
Having decided to build an emergency fund, the question that arises next is…how much?
- From seeing my family’s expenses and from seeing what my friends had gone through, I think a minimum of $5000 pm is an absolute necessity.
- A year’s worth of expenses is what is recommended everywhere.I have nobody I can rely on to host me and my family. I am it.
- I have a pre-existing health condition for which insurance would be almost impossible to get. So, I added $1000 in addition to account for a high cost insurance.
Considering all that, I decided to have 12 months of expenses for my emergency fund i.e. $72000.
Where to keep the Emergency Money?
Having $72000 in a Bank of America account was earning brutally low interest rate. Based on a tip from a wise soul, I came across Smarty Pig, a FDIC insured online bank that was providing 1% interest for the money. So, I decided to move the emergency fund into a Smarty Pig savings bank account.
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