7.2 Building and Maintaining an Emergency Fund

As a general rule, how much money should be kept in an emergency fund?

• $9,700

• $12,500

• no less than 9 months' worth of expenses

• between 3 and 6 months of expenses

Joe has cash in a savings account totaling $7,500, and his monthly expenses are $2,500. What is his emergency fund ratio?

• 0.25

• 3

• 2

• 5

Answer explanation

Emergency Fund Ratio =

(monetary assets) / (monthly living expenses)

Luigi has saved $4,500 in an oline savings account. Does he meet the basic emergency fund ratio guideline if his monthly living expenses are $1,800?

• yes, because he can cut back on his monthly expenses to reach the 6-month benchmark

• no, because he has only enough in the account to cover 2.5 months of expenses

• yes, because he has more than enough in the account to cover 3.5 months of expenses

• no, because he has only enough in the account to cover less than one month of expenses

Your neighbor has monthly expenses totaling $3,725. His employer has indicated that the firm is expecting to announce layoffs soon. How much should your neighbor have in an emergency fund if he wants to cover 6 months of living expenses?

• $22,350

• $3,725

• $11,175

• $20,000

Answer explanation

(monetary assets needed) / 3725 = 6

monetary assets needed = 6(monthly expenses)

With savings of $4,300 and monthly expenses of $9,600, what is your emergency fund ratio?

• 0.2190

• 0.6378

• 0.4479

• 0.4218

With a very stable profession, if your monthly expenses totaled $3,300, approximately how much should you have in an emergency fund?

• $10,000

• $3,300

• $15,000

• $7,000

Which of the following is NOT a wise use of emergency fund money?

• going to the hospital if you unexpectedly become ill

• avoiding foreclosure or eviction

• Replacing an air conditioning unit for your home

• buying gifts

Which of the following sources of emergency funds will have the LEAST negative impct on your lifetime financial situation if the source is used to meet emergency expenses?

• taking money from your savings account

• borrowing money using a credit card

• being unprepared for major car repairs, major medical expenses, and major home repairs

• selling investment assets

Which of the following is an appropriate investment vehicle or source from which to draw emergency funds?

• a baseball card collection valued at $5,000

• a savings account held at the local bank

• an online checking account

• a savings account held at the local bank or an online checking account

Borrowing money in the event of job loss is a bad idea because:

• you may not have access to credit

• you may not have the means to repay the debt

• it may lead to bigger problems

• you may not have access to credit or other means to repay the debt, and it may lead to bigger problems