Emergency FundThe account of money set aside to cover the financial dilemmas that life throws your way.
An emergency fund consists of money that you set aside to take care of the surprise events that life throws your way. You know the ones – when your car engine decides it wants to be replaced, a quick trip to the hospital, or an aged refrigerator. Having an emergency fund in place allows you to handle any of these situations without taking on additional debt. This allows your usual cash flow management to operate undisrupted.
For starters, you should have a basic account with around $1,000 to cover the most immediate of occurrences. This ensures you won’t have to add on any additional short term debt. What we really recommend is having an emergency fund that covers your expenses for at least three and preferably up to six months depending on your risk tolerance.
Unfortunately, emergencies are unpredictable. They are often out of our control because it’s not quite possible to predict every situation that comes your way. What we can control is having a cushion that provides ample time to figure out your next step if you suddenly find yourself unemployed. Unsettling as this situation is, you are already prepared for this. You have the breathing room to make the right decisions when they are needed the most.
Above, we mentioned that you should at least have between three and six months of an emergency fund. While having more is also the best option, you can get away with a smaller fund in certain situations. If you and your family have multi sources of income that support your household, you would most likely be fine with three months of expenses saved up if you lost your job.
Now if your job was the sole income that supported your household, having six months of expenses covered would give you peace of mind. Also this is helpful if you have other inflated that most households don’t have to consider, such as say a chronic illness, and don’t have living benefits.