Monday, March 17, 2008

Emergency Funds

I have been thinking a lot lately about our emergency fund. I have heard people say two things, "3-6 months salary" and "3-6 months living expenses." Most will admit that the more risky your income is, such as if you are purely on commission or a contractor, you should have closer to 6 months instead of 3 months. I think that the living expenses is the best way to go, since its not important to continue saving when you have such an emergency. But there are other factors I have been thinking about...
1) Include money to break out of contracts. Some of our monthly expenses are contractual and it takes some money to break out of those contracts. For example, my Sprint PCS 2 year contract has a fee of $250 to break out of it. Our pool contract does not allow you to break out of a given year's payments unless you sell your home. If you lost your job and are having problems finding a similar paying job, you may need money to break out of the contracts so that your new budget does not have to have those large expenses.
2) Know that COBRA will raise the cost of health care. Trying to find the typical cost of COBRA, I found one article claiming it was $1498 per month and another claiming $600 per month for a family. Frankly, I trust and the second article more.
3) Continue to save for car expenses at a lower rate. If you don't have a car loan and are saving to pay cash for your cars, you should continue to save for that next car but perhaps at a much lower rate. While retirement, college savings, and investments should probably be slowed, your car is still a ticking time bomb. Do you need as nice of a car as you were saving for? Perhaps not.

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