One Caveman’s Financial Journey

One of the mainstays in a secure financial life is the emergency fund. But what that fund should be and where it should be stored is a major point of contention through the professional and blogging world. Some require that $1000 be saved for a rainy day and others go as far as to recommend 18 months worth of salary. But what it should be for you boils down to the facts of your life — this is where the “personal” in personal finance comes into play.

I plan to build my emergency fund to about 6 months of income and then reevaluate its balance and how to allocate it once I reach that goal. I’ll likely make sure that 1/3 of it is always in liquid form — probably cash in a higher yield savings account. Another third might be allocated to higher risk investment, but something that will give a higher average return. The final third I might allocate into stocks and mutual funds so that my fund isn’t just sitting around. It’s risky, but if 4 months have gone by and we’re still in trouble, we would have already taken measures to gather additional income and drastically reduce expenses. Those last 2 months of the emergency fund are solely for CYA purposes.

While I may feel I need 6 months saved, you may be comfortable with 3. To make more sense of my target value, I’ll explain the facts in my life that led me to my conclusion.

I am the sole breadwinner. This means that if I am suddenly unable to work or I lose my job, we have precisely $0 in income (barring any supplements from disability insurance). I need to be able to cover all of our expenses if something cuts off that income.

We have a fairly large mortgage compared to our income. It wasn’t the safest bet on our part, but we took a calculated risk when we purchased this house. When we were both working, we were more than comfortable with our mortgage payments, but we also knew that my wife would be leaving the work force eventually. Now that we are at one income, the mortgage takes up a much larger percentage of our monthly income than it did in the past. We don’t want to lose our house or be forced to sell if we fall on tough times.

I’m starting a business. When you’re starting a business, there is always the inherent risk of it failing (heaven forbid). I want to be able to quit my current job at some point, and I’ll need a safety net in place before I’m able to do that. If I was single, that net wouldn’t need to be so big; but now that I have a family to care for, I need to be able to continue to provide for them if I have trouble building the business to a level that can sustain our family.

I have an older vehicle. Older vehicles often need more maintenance — my truck just stole $400 from me last month to cover a new radiator. We’re not in a position to be able to replace the truck, so we need to be prepared if something does happen to one of our vehicles that would otherwise take money out of our other budgets.

Keep in mind, this is my personal strategy and that I do not recommend that anyone base their strategy solely off of another’s template. Your life is unique with your own challenges and risks. I encourage you to read through what others say about emergency funds and make an educated decision on the path you wish to take. For your convenience, I’ll list a few resources I found on the subject that may help you when you decide how to set up your emergency fund.

• FMF, the man behind Free Money Finance, decided that 6 months was most appropriate for him.
• NCN of No Credit Needed started at $1,000 and moved on to $20,000.
• Trent from The Simple Dollar believes that you should keep 2 months of income in savings per person in your household.
• Jim at Blueprint for Financial Prosperity agrees that there are mitigating factors to consider for any emergency fund.

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