An emergency fund is money you have saved up usually in a savings account to protect you from the unexpected that comes in life. Whether you learn you lost your job or you have a medical emergency or your oven in your kitchen breaks, you will be protected and won’t have to get into debt. Remember, there are always surprises in life, it is just a matter of when they will happen to you.
How much do I need?
Yes, you need an emergency fund. But how much is sufficient to have saved up? Many professionals recommend a 3-6 month emergency fund. That means you should have 3-6 months worth of living expenses. If you are married and your spouse also earns money then a 3 month fund might suffice. But say you are single and have one income or you are self employed, 6 months might be better. If you have medical issues, a 6 month fund might be better than just 3 months.
If your average expenses for the necessities (mortgage, food, etc.) is $2,000 per month then a 3 month fund would be $6,000 and a 6 month fund would require $12,000.
So as you can see it really depends on your situation and there is no set amount really.
Where should I keep it?
The emergency fund should be liquid which means you need to have quick access to it. You need to get to it easily and quickly because when the emergency comes you will need to get to the cash quickly.
So an account like a normal savings account or money market would make sense. You probably would not want to invest the money in the stock market.
Make sure to park it at a bank and in an account that is separate from your other accounts. The money should not be in your checking account where you pay your normal bills from. I specifically have a savings account at the bank that is called “Emergency Fund”.
What is an emergency?
It is important to recognize what an emergency is. An emergency is not having a latte from Starbuck’s…it is not having to go on vacation in Mexico… it is not paying your mortgage because you spent the money on new shoes…it is not going on a shopping free. These are not emergencies.
Is it unexpected? Is it not in your budget? Is it urgent? If you answered “yes” to these questions then it is probably an emergency.
An emergency fund is a money set aside to cover surprises that life throws at you that you do not expect. Things in your budget you can expect, but there are some things you do not plan for.
Here are some examples:
- Losing your job
- Having car troubles
- Medical emergency
- Unexpected home repairs
Related: How I Set Up My Budget
What are the benefits of having one?
There are numerous benefits of having an emergency fund.
First, An emergency fund gives you peace of mind. You sleep better at night knowing you have that cash ready to use in case something pops up.
Second, It prevents you from getting into debt. When you have an emergency fund you don’t need to get a loan or put it on the credit card. You can just use the emergency fund.
Third, Your stress level goes down. It is easier to sleep at night knowing there is money at the bank to lean back on if something bad happens to you.