Saturday, June 23, 2007

Emergency Funds--How, When, and How Much?

Solitary Dancer, at Bare Bones Living (See the link under "Personal Finance Blogs I read") is trying to figure out whether to pay off debt first or put money into retirement. See her comment regarding my prior posts on the subject here: http://barebonesliving.wordpress.com/2007/06/22/grace-made-me-do-it/

Consider this a case of the blind leading the blind, but what I notice is that Solitary Dancer is actually doing (or trying to do) three things at the same time--pay off debt, establish a long-term emergency fund, and save for retirement. Like me, she is in her 50's and getting a late start. My advice would be to hang onto a very basic emergency fund of $1000 and put the rest of her contribution either toward the debt or into a retirement fund. Of course, I don't know the stability of her employment situation or her health, so there might well be other reasons why it is important for her to get a long-term emergency fund (usually defined as three to six months of living expenses) set up.

For myself, I know that my position at work is relatively safe and that it is likely I can stay there until retirement. There may be times in the future, as there have been in the past, where my salary will be frozen or my time cut back, but I am not overly worried about being laid off. Fortunately, my employer also provides disability insurance which kicks in after sixty days, should my health take a bad turn. Since I have at least that much in unused sick time, I don't have to worry about using my emergency fund to support myself.

So a $1000 basic emergency fund suits me. Everything else I get, after basic (and, I hope, more frugal) family living expenses, goes to the debt and to the retirement fund.

1 comment:

Living Almost Large said...

If you are really okay with the job drop the EF. Put everything on the CC and as you need it charge it. Some people do it to get out of debt faster.