If nothing else, I think the Great Recession may have served as a much needed wake up call to many American households. In saying that, I certainly do not mean to diminish the financial and personal struggles of those individuals and families affected by lost jobs, lost homes, lost retirements, and other difficulties prompted by the economic downturn of the past few years.

But I can’t help but wonder if sometimes life challenges us and exposes our weaknesses in order to bring us a little wisdom and help us make much needed changes in our life. The priest at my Catholic grade school (gosh that was a long time ago) was fond of saying – “God never gives you more than He knows you can handle”.

Prior to the economic downturn of the past few years how many of you thought about visiting a personal finance website? How many of us deliberately chose to forego a meal out for a dinner at home? Do you find yourself a little less inclined to take that credit card out for that new sweater, those baseball seats or that new CD on Amazon? Plainly … have you found yourself spending a little more time thinking about saving money and a little less time thinking about spending it? I know I have. And in large part, I think it was prompted by the Great Recession – an event that has (or should have) forced many of us to question our financial security and that of our families.

While there are many lessons to be learned regarding the recession – and I’ll try to focus on the lessons and leave the seemingly non-constructive finger pointing to the experts – I think one of the biggest areas

that we should be looking at is our financial security and ability to withstand financial challenges and obstacles that may affect our families. As we’ve seen – such challenges may come in the form of big market swings that diminish our retirement accounts, they may come as a result of an unexpected job loss because of a company downsizing, or they may come as a result of a poor decision (maybe buying more house than we could afford?).

As intelligent people, we certainly can take steps to maximize our ability to deal with the unexpected financial challenges that life can (and undoubtedly) will bring. But how? The answer is very simple – you MUST have an Emergency Fund.

What is an Emergency Fund?

An Emergency Fund is not your Retirement account, it is not your 401(K), it is not an investment property, it most certainly is not your ‘emergency’ credit card, or we’re really in trouble if you think it is your parents’ bank account.

An Emergency Fund is a liquid (meaning you can access it very easily and without penalty) account that contains enough money to cover 9-12 months of your monthly expenses. In the past, financial experts and planners would recommend 3-6 months of expenses in an Emergency Fund; in my mind that is no longer adequate given the tremendous financial vulnerability of the average American that the Great Recession exposed. This is not “the sky is falling” sensationalism but rather a realistic view of how to best build a financial safety net. Initially, you may want to set a more easily attainable Emergency Fund goal – maybe that’s a $1,000 for you (as Dave Ramsey recommends) or maybe that’s 3 months of living expenses. Regardless, I’m suggesting that you must adopt and firmly commit to the idea of having a financially safety net and that long-term, you should strive for a broader and more robust Emergency Fund.

Rules for Building an Emergency Fund

1) The first rule of Emergency Fund is – “Start Emergency Fund”. Don’t be intimidated by the dollar amount and let yourself get overwhelmed at the prospect of someday saving 9-12 months of living expenses. Simply remember the saying – ” A journey of a thousand miles begins with a single step”. Initially, a Savings Account at your current bank will suffice just fine and typically you only need $5 to open an account.

2) The second rule of Emergency Fund is – “Contribute to Emergency Fund”. That means you build Emergency Fund contributions into your monthly budget and stick to it (whether that’s $20 or $200 a month). The Emergency Fund has to fall into your ‘must have’ expense column every month and not the ‘nice to have’ column.

3) The third rule of Emergency Fund is – “Keep Your Hands Off!”. The Emergency Fund is not the – “Oh, Sarah needs braces fund”, the “We really could use a family vacation fund”, a “new car down payment fund”, or the “Christmas presents for the kids fund”. This is an Emergency Fund only and you and your spouse need to sit down and agree on list of “Emergency Fund Approved Uses” – both of you must buy into this list and hold each other accountable. Things on my family’s list – major unexpected medical expenses, unexpected job loss, and a relative or friend in SERIOUS need.

4) The last rule of Emergency Fund is – “Challenge Yourself”. Don’t get stuck in the rut of only putting your $20, $50, $100 or whatever dollar amount you have budgeted for your Emergency Fund on a monthly basis. You should be excited by the idea of providing financial security and protection for your family – so get aggressive/creative in your efforts. A couple of things I’ve done to increase the growth our family’s Emergency Fund – tax returns going directly to our E.M., a yearly bonus going to our E.M., and in the early years my wife and I challenged each other to increase our Emergency Fund contribution by 10% each year.

Again, there are a number of different approaches and thoughts when it comes to establishing an Emergency Fund. As with many things in life, individual and family circumstances and needs often dictate what is appropriate. But lets not let the Emergency Fund go the way of moral relativism and be content with an “anything goes” approach. Regardless of which financial guru you read, the investment guidelines purported online, or your particular personal/family circumstances, the establishment of an Emergency Fund is an absolute necessity for your long-term financial well being.

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