Why you need an emergency fund

One of your primary financial goals, or the chief financial goal, should be to set up an emergency fund if you don't already have one. It's not a matter of if you'll have an emergency – we all do – it's simply a matter of when. Financial emergencies can come in the form of job loss, home and auto repairs and, most commonly, unforeseen medical expenses. So, how much do you need to prepare for these emergencies? Most experts recommend saving three to six months of post-tax income. Sound intimidating? Starting out small is better than not starting at all.

You've probably heard the phrase "rainy day fund" or "saving for a rainy day" more than once in your life. It used to be a common habit for folks to save for unexpected emergencies. Recent surveys from the National Foundation for Credit Counseling show that today, 64 percent of Americans would have difficulty coming up with even $1,000 in an emergency situation.

What do these people plan to do if a financial emergency arises? Respondents answered with solutions like borrowing from family, pawning or selling their belongings, or not paying their bills. Some said that they'd use a loan from a cash advance store or use credit cards.

Most of those options result in not only a temporary emergency but can result in long term debt. Saving in preparation for those inevitable emergencies is unquestionably the smart way to go. Three to six months' worth of savings often makes people shy away from creating an emergency fund, but it shouldn't.

Best-selling author and personal finance guru Dave Ramsey recommends having a $1,000 emergency fund in his debt-free plans. When you think about it, $1,000 can be extremely useful. It can repair or replace a broken water heater. You may be able to repair a broken down vehicle with $1,000. That amount may also put a good dent in an emergency room visit, should one arise.

Experts recommend that you keep your emergency fund in an easily accessible savings account that will give you access to your money within one or two business days. Don't keep your emergency fund pooled with other resources; it will be too tempting to spend it. If you don't already have an emergency fund in place, start one as soon as possible.

What are your savings goals for this year? Share them in the comments.

Photo courtesy of Jase Curtis via Flickr.