Save your way to soft landing in emergencies

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We would tap the fund and build it again. Along the way, we enjoyed the ability to say no to extended warranties, pay less for insurance by taking high deductibles and never pay a finance charge on a credit card because a large expense arose. In that way, having the cash allowed us to make choices that made life cheaper.

Maybe most important, however, was the emotional freedom the fund provided. We got to the point where we viewed the cash as a "take this job and shove it" fund. If either of us got fed up at work, we could quit without immediately having a new job lined up. We didn't have to be trapped in work that made us miserable.

So, my wife quit her job. The emergency fund filled the income gaps of intermittent consulting work she was doing.

After 10 months out of work, she's rested, revitalized and ready to resume her career full-time.

For our family, our opportunity fund was a real example that money can, indeed, buy happiness.

Emergency fund frequently asked questions

Q. Who needs one? 

Everyone whose life doesn't always go perfectly — which is to say, everyone.

Q. How much do I need?

Typical advice is cash equal to three to six months of bare-bones expenses — food, shelter and utilities. But that dollar figure can be overwhelming. Start with intermittent goals, such as $1,000, $2,500 or enough to pay four months of the mortgage or rent. The amount you ultimately need will depend on a variety of factors including whether you have a two-income household — if an emergency fund is to protect you from job loss, families with two earners are less likely to have all their income cut off.

Q. Where does it fall among money priorities?

It's a good idea to start with a small emergency fund, say $1,000 or 2 percent of gross household income. But then turn attention to high-interest debt, such as credit card balances, before returning to the goal of beefing up the emergency fund.

Q. Does it have to be in cash?

Preferably. Cash gives you the most options and is quickly available. But when trying to safeguard against job loss, which requires a much bigger fund, consider unused credit on credit cards, home-equity lines of credit (HELOC) and even potential borrowing from family.

Q. Where do I keep it?

Ideally, you would keep cash in a separate account. Consumer behavior studies show we're more likely to keep our hands off it for discretionary spending because of "mental accounting." We view that money as unavailable. Don't stress about earning decent interest on the money. Think of it more as insurance than an investment.

Q. Where do I get the money?

Fund it with automatic contributions — an electronic transfer from your checking account on pay day, for example. Also fund it with lump-sum windfalls, such as a portion of your income tax return.

gkarp@tribune.com

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