What is An Emergency Account?

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So what is an emergency account and why is it important in the area of personal finances?  An emergency account is a specific amount of money set aside to only be used when a costly unplanned financial expense occurs.  Examples of this are transmission breakdowns in vehicles, appliance repairs and replacements, temporary job loss, etc. 

My personal experience with this occured when the gears in my car's transmission started slipping not long after I acquired this vehicle.  A transmission specialist let me know that the car could breakdown anytime and that the whole transmission needed replaced.  This costed me thousands of dollars.  

I'm sure you have heard the saying when you fail to plan you plan to fail.  Personal emergency accounts are great examples of this.  

So what is the best way to set up an emergency account?  You would want to set aside a specific amount of money each month in order to save over an extended time frame.  The recommended amount to be saved is equal to be approximately 3 months of your income.  The type of account you place the money in needs to be liquidable and it helps if it makes interest.  

Is it better to pay off my debt first or build up my emergency account?  I've heard different opinions on this and seen different approaches.  Some people say save up a thousand dollars first because most emergencies can be covered by a thousand dollars.  Then pay down all debt except your mortgage.  After this you can complete saving for your emergency account.  

To me determining factors are how much debt you have, what is your income and expenses, and do you have other people in your household who can help share in any emergency expenses?  Also I found out even after you have an emergency fund and start paying off your debt, you could have an emergency at that point that empties your savings.  From there you will need to rebuild that emergency account back up and this could take a couple more months.

In summation, an emergency account is preparation for unplanned expenses.  The best way to set up an emergency account is to save a specified monthly amount in a liquidable account that creates interest until you reach your specified goal.  Whether you pay off your debt first, create your emergency account, or do both simultaneously depends on how much debt you have, your income and expenses, and if you have other household members who can help with your emergency expenses.

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