What's In Your Emergency Fund?

It's a widely-held belief that everyone should have an emergency fund set aside, but what does this really mean? What do you consider an emergency, how much money should you set aside, and where's the best place to keep this money?

These questions bear serious examination because a 2008 survey suggests that Americans fall short when it comes to saving for an emergency. Looking at the issues should give you a better sense of how much money you might need, and why money market accounts might be the best vehicle for these savings.

Survey Shows Americans Under-prepared

A 2008 survey showed that the average moderate-income household perceived that they would need savings of $3,000 in an emergency, and yet less than half had emergency savings of even $500.

The obvious problem here is that most households are woefully unprepared relative to what they think they'd need in an emergency. On top of that, though, it's worth asking whether $3,000 would really be adequate.

What Do You Consider an Emergency?

How much you need in your emergency fund depends on what you consider to be an emergency. While people tend to think of the more dramatic examples, the truth is that emergencies can range from the catastrophic to the routine. Both require some financial preparation--catastrophic events because they can require large sums of money, and more routine emergencies because they have a high likelihood of occurring at some point.

The following are some examples, with a discussion of how they should factor into your emergency planning:

• Job loss. This is probably the financial setback people fear the most. Knowing that it can take several months to find a new job you'll want to add up your routine expenses and set aside enough to pay six months' worth of bills. Beyond that, though, you might want to set aside some extra money for retraining, since that may be what it takes to get a new job.
• Medical bills. Part of preparing financially for medical emergencies is knowing what deductibles and out-of-pocket limits you'd face on your insurance if faced with a major illness or injury. However, don't forget also to factor in what it would cost you to pay your own insurance premiums if you lost your job.
• Repairs. From a leaky roof to a flat tire, some emergencies are a little more commonplace, but nonetheless expensive. Unless you have considerable flexibility in your monthly budget, you'll want to be setting money aside for these inevitable occurrences.

Emergencies, then, range from large to small, and from low to high probability of occurence. This variable nature makes a money market account a good option for your emergency savings fund.

The Role of Money Market Accounts

So how do money market accounts fit into all this? Money market accounts offer more flexibility than savings accounts, but money market interest rates are better than you'll typically do in a checking account. In fact, if you take the time to shop for the best money market rates, you'll find that over time they can contribute to your ability to pay for emergency needs. With the right funding, and by using a money market account for a combination of flexibility and income generation, you'll find you'll be able to feel more prepared and more secure.

Source: Stephen Brobeck • Understanding the Emergency Savings Needs of Low and Moderate-Income Households: A Survey-Based Analysis • Nov 01, 2008 • Consumer Federation of America: http://www.consumerfed.org/pdfs/Emergency_Savings_Survey_Analysis_Nov_2008.pdf