Q.  I’ve heard it’s good to have an emergency fund. How much should I have and where should I keep it?

You are certainly correct that it’s important to have some money set aside for life’s inevitable emergencies.  It’s not a question of “if” an emergency will occur; it’s a matter of “when”.  I’ve noticed that those with an emergency fund tend to have fewer emergencies!  Money set aside turns what would be an emergency into simply an inconvenience.  Emotionally, this difference is huge.

How Much To Save

My general recommendation is to set aside between three and six months of your essential monthly expenses.  Essential expenses are things like your rent or mortgage payment, food, utilities, basic clothing, health care related expenses, and minimum payments on your loans.  Non-essential expenses include eating out, taking vacations, entertainment, unnecessary clothing purchase or even saving for college and retirement.  You can find some more detailed emergency fund information at this earlier blog post.

Certainly, a three to six month range is rather large.  Depending on your free cash-flow each month, it can take quite some time to build such a large stash of cash.  How do you decide which end of the range is appropriate for you?  Look at your income situation to decide.  For example, if you are a dual-income family, with secure jobs in stable industries, you are probably safe with an emergency fund closer to three months.  However, if your family has only one income stream or if your profession has limited job opportunities, I’d recommend something closer to six months.

Where to Keep It

Finally, where do you keep your emergency money?  I recommend an FDIC-insured bank account, either locally or via an on-line bank.  Link the new account to your checking account so you can access it quickly and easily.  Your emergency fund should not be kept in your checking account as it would be too easy to spend!  It should not be invested in something that could drop in value.  Instead, view these funds as “insurance” not an investment.


John Madison is author of “The Steward Plan,” a Certified Public Accountant, and founder of Dayspring Financial Ministry. He earned a Master’s Degree in Personal Financial Planning (MSPFP), the MPAS (Master Planner Advanced Studies), CRPC (Chartered Retirement Planning Counselor) and AWMA (Accredited Wealth Management Advisor) designations. He has been featured in the New York Post, Forbes, Fox Business, Crosswalk, The Christian Post, Charisma Leader, Chicago Tribune, U.S. News and World Report, AARP.com, Bankrate.com, CNBC.com, among many other media outlets. For more information, visit http://www.dayspringfm.com.