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MoneyRates.com 2011 resolution #10: Re-stock your emergency fund

October 05, 2011

| MoneyRates.com Senior Financial Analyst, CFA

Have you raided your emergency fund? Given the economy of the past few years, that's understandable. The important thing is to have a plan for re-stocking that fund for the next emergency, which is why re-stocking your emergency fund is the 10th MoneyRates.com monthly resolution for 2011.

The role of an emergency fund

An emergency fund should be the first block of savings you build up, and it should be maintained to one extent or another throughout your life.

An emergency fund should be six-to-twelve months' worth of basic living expenses, set aside in readily-accessible vehicles such as savings accounts or money market accounts. If you can find a long-term CD with a low early withdrawal penalty, that can also be a good option, since the best CD rates on long-term CDs could make it worth paying such a penalty if necessary.

The role of the emergency fund is to help you weather financial setbacks, such as unexpected expenses or loss of income, without going into debt or dipping into long-term retirement savings.

Redefining emergency

Unfortunately, the economy in recent years has redefined emergency, as adverse conditions have become routine. According to the Bureau of Labor Statistics, 14 million Americans were unemployed as of August 2011. More than 40 percent of these had been unemployed for more than six months. Those are precisely the type of conditions that can force a household to dip into its emergency fund.

There's nothing wrong with using an emergency fund to help you through a period of unemployment, but as soon as you get a job again, you need to observe two rules:

  1. Start paying back your emergency fund right away. Treat it as if it were a monthly bill.
  2. Adjust your budget if your income has dropped. Don't continue to use an emergency fund as a supplement if you've taken a lower-paying job. This may be your new reality, not an emergency.

If you've found your emergency fund useful in recent years, that's all the more reason you should want to rebuild it so it will be there in the future.

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