First Person: How Much of an Emergency Savings Fund Is Enough?

For the 59% of Americans who are living from paycheck to paycheck, building up an emergency savings fund may seem impossible. While the financial experts recommend that we have six to eight months of living expenses squirreled away, many of us can barely scrape together enough money to pay for a leaky roof or a set of new tires for the car.

How much of an emergency savings fund do we really need? It depends on your definition of an emergency. For me, an emergency is an unexpected event that can't be paid for out of the checkbook. These include expenses such as:

-- Unexpected death in the family
-- A tree that toppled onto the roof and took out the power
-- Transmission or engine replacement on a car
-- An oven or frig that just up and died
-- Plumbing disasters.

Our family tries to keep about $5,000 in a special savings account to cover these emergencies as they come up, since we have an older fixer-upper type home and drive older cars. Many of my neighbors and friends, however, keep between $1,000-$2,000 in their emergency savings accounts. What's important is to have some money in a savings account that can be tapped in case of an emergency. Having ready cash means that you can pay cash for these emergencies instead of charging them on a 28% interest rate credit card.

So, back to the advice of the financial experts who recommend a savings fund of 6-8 months of living expenses in case of death, job loss, or injury.

There's no arguing that we all should have money saved up in the bank as a hedge against bad luck. But for families with a heavy debt load, a better strategy combines savings and debt reduction in three easy steps.

-- Start by saving $1,000-2,000 for an emergency. This will help you cash flow emergencies and break the cycle of charging.
-- Pay down consumer debt. Once you have emergency cash set aside, start paying down the credit cards and other revolving debt as quickly as possible.
-- Start saving again. After the revolving debt has disappeared, take the money you were using to make payments and sock them into a savings account instead.

More from this contributor:
Ten Ways to Cut Food Expenses and Increase Your Savings.
How to save money easily without changing your lifestyle.
Top 5 personal financial planning tools & strategies for reaching your goals.