It’s time for another article on emergency funds!

I know I’ve already talked about them but remember that the most basic of financial lessons (while somewhat simple to understand) are the ones that you should be most knowledgeable about.
1) Compounding interest
2) Early retirement savings (401K and ROTH)
3) Knowing how/where to invest
4) Emergency fund
5) Using debt to your advantage
6) Don’t give up

Coco Chanel said: “Success is often achieved by those who don’t know that failure is inevitable.”

Learn these 6 things and your success in inevitable.

Is an emergency fund important? Is having a cash buffer that might cover unpredictable expenses that may come along important?

I guess the strength of your answer is directly proportional to your risk tolerance and your belief that you will never face any form of financial pressure.

If you lost all sources of income, job, investment income, and the somewhat reliable change you find on your daily amblings about town, how long would you be able to survive without having to look into taking out early contributions from retirement accounts and other sources of money you had previously deemed ‘untouchable?’

Many financial advisors would advocate anywhere from 3 months to a year’s worth of cash expenses in a cash savings account. If you’ve read around, you’ve also come across various methods of starting your savings account funding via $10/wk or month or 5% of your salary in a savings account you would only tap in emergencies. I fully agree with their logic and appreciate the methods they offer for jump starting your emergency funding.

The best ways to start up that emergency fund:
1) Open up a savings account and start putting just $10/wk into it. Over time, increase this number as much as you can.
2) Take some of that birthday money/work bonus/tax refund and put into a high yielding savings account
3) Re-fill out your direct deposit information at work and put just 5% of your salary into an account that you won’t look at very often.
4) Don’t use the funds in your account for anything other than actual emergencies
5) Don’t be put off course by the fact that your account isn’t getting immediately big…it will take some time to build up a cash buffer
6) If you have a few extra dollars in any of your accounts, transfer them over to your savings account. Every little contribution make a difference over time.

The minds over at Blueprint for Financial Prosperity wrote a great article discussing why an emergency fund isn’t needed. They site that the article is a devil’s advocate posting and that: “[B]efore you read on, let me be absolutely clear … you should have an emergency fund, but if you want a few reasons why you shouldn’t… here they are.” Another article from Advanced Personal Finance : Moving Beyond the Basics also shares his view on why an emergency fund isn’t fully needed.

While they both provide some interesting incite into the fact that high interest debt reduction should be your primary goal with the option of using credit cards should you face an emergency. I fully agree with several of the points that are made but I still prefer having some cold hard cash to cover rent, food, and basic travel expenses.

A few emergency fund articles:
11 ways to jump-start your savings : Bankrate
How and Why to Start an Emergency Fund : Get Rich Slowly
Bouncing Back from a Financial Setback : Fidelity
8 ways to save for a short-term emergency fund (or any personal finance savings goal)

Please refer to my prior posting ,The Importance of an Emergency Fund, if you would like some additional information.