A poll in Parenting Magazine said that 49 percent of Americans could cover less than one month’s expenses if they lost their income. Half of this culture has virtually no buffer between them and life.

Here comes Murphy!  If something can go wrong it will.  

It will rain; you need an umbrella. Money magazine says that 78 percent of us will have a major unexpected event within the next ten years. When the big stuff happens, like the job layoff or the blown car engine, you can’t depend on credit cards.

If you use debt to cover emergencies, you have backtracked again. A well-designed Total Money Makeover will walk you out of debt forever. A strong foundation in your financial house includes the big savings account, which will be used just for emergencies.

Putting together a fully funded emergency fund is Baby Step 3 of your Total Money Makeover. Before you reach this step, Baby Steps 1 and 2 should be completed. You should have $1,000 in the bank and be debt free except for the house.

A fully funded emergency fund covers three to six months of expenses. What would it take for you to live three to six months if you lost your income? Financial Planners and Financial Counselors like myself have used this rule of thumb for years, and it has served my Total Money Makeover participants well. You start the emergency fun with $1,000, but a fully funded emergency fund will usually range from $5,000 to $25,000. The typical family that can make it on $3,000 per month might have a $10,000 emergency fund as a minimum. What would it feel like to have no payments but the house, and $10,000 in savings for when it rains?

Problems seem to be (and I believe actually are) less frequent when you have your fully funded emergency fun. Don’t forget that the emergency fund actually acts as Murphy repellent.

So, what is an emergency anyway? An emergency is something you had no way of knowing was coming, something that has a major impact on you and your family if you don’t cover it. Emergencies include paying the deductible on medical, homeowner’s, or car insurance after an accident, a job loss or cutback, or a blown transmission or engine on a car that you need to function.

Something on sale that you “need” is not an emergency. Fixing the boat, unless you live on it, is not an emergency. “I want to buy a car or a leather couch or go to Cancun” is not an emergency. Prom dresses and college tuition are not emergencies.

Beware not to rationalize the use of your emergency fund for something that you should save for and purchase. On the other hand, don’t make payments on medical bills after an accident while your emergency fund sits there fully loaded. If you’ve gone to the trouble of creating an emergency fund, make sure you are crystal clear on what is and is not an emergency.

Before you use your emergency fund, back up from the situation and calm down. Sharon and I would never use the emergency fund without first discussing it and being in agreement. We also would never use the emergency fund without sleeping on the decision and praying about. Our agreement, our prayer, and our cooling-off period all help us determine if this decision is a rationalization, a reaction, or a real emergency.

Keep your emergency fund in something that is liquid. Liquid is a money term that means easy to get to with no penalties.

I use growth-stock mutual funds for long-term investing, but I would never put my emergency fund there. Mutual funds are good long-term investments, but because of market fluctuations, you are likely to have an emergency when the market is down—another invitation to Murphy.

I suggest a Money Market account with no penalties and full checkwriting privileges for you emergency fund. Wherever you get your mutual funds, look at the Web site to find Money Market accounts that pay interest equal to one-year CDs. But keep in mind that interest earned is not the main thing. The main thing is that the money is available to cover emergencies.