Recently, a post of Deaf Musician inspired me to write this one. His post reminded me about the idea of a security deposit in your savings account for a rainy day. That’s very true that while investments in mutual funds may offer you a very comfortable and early retirement, a near future unfortunate events may put you in a very uncomfortable situation, or even in debt…

If you loose a job, you may spend from a month to 4 months without salary, but your regular payments will be still due: mortgage, car loan, child care service, and so on. Nobody protected from that… But you can protect yourself from such likely situation by creating an emergency fund of your own (FU Fund by Deaf Musician ). I do have such fund that will allow me to survive for 3-4 month without a job.

Emergency Fund

The size of the emergency fund (or the amount of money in it) may not be very big, and should let you to stay on the surface for 4-6 month. The best way to determine it’s size is to get your necessary monthly expenses multiplied by 4 or 6. By necessary expenses I mean all your loan payments plus minimum grocery spendings. Let say, an average family of 3 in US has a mortgage payment of $1100, a car loan of $300, spends about $100 for groceries (not exotic and expensive stuff but only the basics) plus $500 for gasoline and other expenses. Thus, you need about $2000 per month, which makes $12000 for 6 month for the survival kit.

How To

Saving money is a very painful process, especially if your income is not very high… Look at your habits, you may save up to $5 a day by rejecting some not very necessary things like an extra cup of Starbucks coffee, sweets, cigarettes (yes, quit the nasty habit ;), you can save up to $100 a month!), etc. Start small, save at least for one month ($2000), and so on!

You can keep those money in your bank savings account, but a better way to do it is to keep it in a high return saving account like EmigrantDirect.com or others similar, any return of 5% or more a year will save your money from the inflation (about 4% in most countries). Before opening a savings account in such place, ask the manager if it’s insured against losses.

I do not recommend to keep your emergency fund in a money market savings account though, because it’s not insured and you may have losses associated with the money market nature (similar to the stock market).

Happy saving!

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