The emergency fund is a crucial asset in financial stability. We look at it as a life raft to keep you afloat.
Why do you need an emergency fund?
Emergency funds are like insurance. You may never use it, but if you need it, you really need it. If you require money to pay for something that you didn’t plan for, you have a backup plan to get you back to where you want to be.
When to start?
If you haven’t already, start now! Not having an emergency fund is like driving a car without insurance; it’s just asking for trouble.
How much to keep in your fund?
Experts suggest keeping 6 months expenses in your emergency account. Simply determine how much money you spend on rent/mortgage payments, food, gas, car payments, and any other necessities/non-negotiable monthly expenses, and multiply it by 6. It would be even better to have 6 months pay saved up if you can afford it!
Here are some important factors to consider when deciding on the size of your fund:
- Number of dependents
- Level of job and income stability
- Liabilities (homes, vehicles, etc.)
Where should you keep your fund?
We suggest keeping your emergency fund in something liquid and easily accessible, like an FDIC insured checking or savings account. Keeping it in higher-risk investments, like company stocks, is rather foolish. You wouldn’t store your life raft deflated with no air compressor or leave it at the dock, would you?
When should you use your fund?
Here’s where you need to be disciplined. If you use your emergency fund for something you think you need, but really could do without, you’re doing it wrong. Reserve the emergency fund for unexpected financial expenditures that you absolutely have to pay for:
- Expenses while in between jobs
- Home repairs
- Car repairs
- Medical bills
- Funeral costs
- Family emergencies
