The Importance of Having an Emergency Fund

Building Up Your Cash Cache

Tammy Perry had to rebuild her savings after relocating.

When the National Foundation for Credit Counseling in Washington, D.C., conducted its 2012 Consumer Financial Literacy Survey this spring, the results were sobering. The number of Americans saving for a rainy day had dropped significantly.  When asked, “Do you have any savings, excluding retirement savings?” Thirty-nine percent of respondents answered no. “That’s the highest percentage since we began asking in 2008,” says Gail Cunningham, NFCC spokeswoman, “and a 6% jump in just one year.”

Plagued by recession, high unemployment or underemployment, and rising living costs, Americans just aren’t saving the way they used to, says Camille Winfrey, financial solutions adviser with Merrill Edge in Atlanta. A situation can become dire when an emergency such as a car repair, medical bill, or other expense rears its ugly head. For most, the only way to address such needs without stealing from the “living expense” pot is by having a separate, emergency fund. “You don’t want to go into debt over a $500 car repair bill,” says Winfrey, “yet that’s often what happens when people have no cash reserves.”

Two years ago, Tammy Perry exhausted her savings, roughly $7,500. The 34-year-old Perry had just moved to New York City from Montgomery, Alabama, where the cost of living had been lower and she earned $2,000 more per month. Perry left her full-time job as a career counselor with the state of Alabama to start a business. She is now the owner of a training and education consultancy, Stockroom2Boardroom.

“I had no emergency fund left because I spent it all on living expenses,” says Perry. To get back on track, she began working with financial adviser Lynesha McElveen of Liberty Educational Group. The first step was to reduce unnecessary expenses, such as a full-featured cellphone data plan (changed to a prepaid option) and home cable service (switched to Netflix for $15 per month). Perry put the extra money in her emergency fund, held in an interest-bearing savings account.

“One year later I had $1,000 in that fund,” says Perry, who began allocating 3% of her income to it. “By year two I was saving almost $2,000 per year.” The goal is for Perry to shore up at least three months’ worth of living and business expenses, or $12,000, and to leave that money untouched.

Winfrey says most people can get away with maintaining three to six months’ worth of expenses in an emergency fund, but notes that those dealing with job uncertainty or income fluctuations should consider a six- to nine-month timeline.

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