When I first started working, I had always wanted to have an adequate emergency fund. It was tough in the beginning. I had to buy suits for work, a laptop, some stuff for the place I was renting. But eventually, I got around it. Here are some of my thoughts and experience.

How much to have? - How much should your emergency fund have? This is a very tough question. Conventional wisdon says you should have anywhere between three to six months of living expenses. Well, I personally saved up to one years worth of living expenses. Why? Because I’ve seen friends got laid off and were out of work for over a year! But I think there are a few things you have to consider….

1. How stable is your job? - Do you work in the public sector? How stable is your job? If you in real estate sales, then you’d better have a bigger emergency fund because your earnings may be very volatile and unpredictable. If you are a teacher, you may need less of an emergency fund.

2. How adequate is your health care policy? - Assuming you have health insurance with your company, how comprehensive is the coverage? How high is the deductible? These are questions you have to know. Make sure you have enough in the bank for any unexpected medical expenses.

3. Do you have disability insurance? - This is a very important thing. If you are in sales and on a 1099, chances are that the firm you work for does not provide for any disability insurance. Make sure you have adequate disability insurance. I’ve seen people without them suffer financially because of an unexpected major illness. If you do not have any disability insurance, then you definitely need a much larger emergency fund.

Other sources of liquidity

But aside from having an emergency fund, you should also have other sources of liquidity. You should have a home equity line of credit, an adequate line of credit from your credit card.

Have an adequate emergency fund and insurance coverage before you invest

Having an adequate emergency fund and insurance coverage is like setting the foundation of your house (your financial house). Only when the foundation is in place should you think about having a systematic savings plan.

This entry was posted on Thursday, June 28th, 2007 at 1:47 am and is filed under Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.