Are you ready for your money to start taking care of you? If so, then this is where safety begins: the Emergency Fund. It crushes me to see how many families have little or no savings protecting them from misfortune. Just how bad is it? The 2009 MetLife "American Dream" survey suggests that 50 percent of us have less than one month's expenses saved for emergencies. Worse yet, 28 percent of respondents had less than two weeks' worth of expenses in savings. In a related 2008 survey, this one by the Consumer Federation of America suggests similar problems. While 71 percent of respondents said they have "sufficient emergency savings to pay for unexpected expenses like car repairs or a doctor visit," the broader (and much more difficult) topic of having a savings cushion of several months' worth of expenses was noticeably absent.
Your debt payoff plan is about getting yourself out of debt now, and doing it as quickly as possible. Your Emergency Fund, on the other hand, is about staying out of debt. It's the force-field you build around your life to keep the debt ghoulies out. A fully-funded Emergency Fund means freeing yourself from debt forever. Whether you call it an emergency fund"), contingency fund or safe and sound money, there is no one-size-fits-all here. Rather, the amount you keep in your E-fund must be an amount that makes sense for you. It will depend on whether you're already debt-free ... or loaded down with debt. It will depend on whether you have a single- or dual-income household. It will depend on what makes you feel secure.
If you're smack in the middle of a messy debt pay down, for instance, it doesn't (usually) make much sense to keep a big pile of cash in savings. Why on earth would you want to clutch at money that earns you, say, 3 percent interest, when your balance sheet is clogged with debt that's costing you 8 ... 10 ... 12 percent or more? You're sending money straight out the front door. Yet lots of people do just that. The reasoning is easy enough: Having a chunk of cash in savings helps you feel secure. But if you're also carrying expensive debt (read: any interest-accruing debt other than perhaps mortgage debt), then that "security" you feel when you check your savings balances is largely an illusion.
But families do have a need for some savings behind them, whether they're in debt or not. If you're going to break the cycle of credit-card dependence, after all, you will need to have some money available for Life's little emergencies. Otherwise you'll turn to plastic again and again. You'll be just as dependent upon it as you ever were. What you need is a "beginner" Emergency Fund.