Emergency Fund: Why You Need One
December 14, 2006
As a financial planner, I encourage my clients to have an emergency fund. This is often met with the following questions:
1. Why do I need an emergency fund? and
2. How much should it be?
To answer the first question, you need an emergency fund for the following unexpected expenses or situations:
* Car repairs
* Home repairs or improvements
* Job loss
* Job downsize (forced to work fewer hours)
* Unexpected medical expenses
By having an emergency fund, you won’t be forced to turn to credit cards to pay for these unexpected bills.
The general rule of thumb is to save between three and six months of your living expenses in an emergency fund. If you have no dependents, good credit, and a steady income, you can probably get by with three months; if you have a fluctuating income or work in a field that is not steady (home construction is a great example right now), you should aim for six months in your emergency fund.
One more thought… you should keep your emergency fund in a high interest money market or CDs (a portion, not all of your emergency fund) to earn a higher interest rate than your checking/savings account.