5 Questions to Ask Yourself Before Setting Up your Emergency Fund
The topic of “emergency funds” is a hot topic of debate among those pursuing Financial Independence. Some such as the Dave Ramsey advocate that you keep 3–6 months worth of expenses in cash in case of emergencies such as a job loss or leaky roof. While other’s advocate you don’t have anything in an emergency fund and focus entirely on either paying off debt or investing in assets that will help you grow your wealth.
Personally, I don’t have a hardline position on the emergency fund question, but here are five important questions you should ask yourself before you determine how much to stash away in your emergency fund
5 Questions To Ask Yourself Before Determining The Size of Your Emergency Fund
1. Do you Have Credit Card Debt?
Nothing will ace your financial future like hanging on to high-interest credit card debt for an extended period of time. If you have a high balance of credit card debt that you are paying 20% or more in interest, most financial experts agree that addressing that should be priority #1.
If you own your home you might be able to consolidate that credit card debt and greatly reducing the interest you pay by refinancing your mortgage or opening up a home line of credit. Some banks might offer you a non-secured consolidation loan to pay off your credit cards and “consolidate” them all into a single monthly payment with a lower interest rate that is more manageable.
The point is if you have credit card debt you need to address that situation because having high amounts of credit card debt in itself is a “financial emergency”.
2. What is Your Current Savings Rate?
How much of your take-home pay are you saving each month? If you are living pay cheque to pay cheque, then you are living in a much more dangerous financial situation. If you lost your job how long would it be before you could not pay your bills? If you currently have a low or even zero savings rate you might want to put an emergency fund near the top of your financial priorities.