Emergency funds can be helpful for everyone. Any unexpected hit to your finances, and unanticipated illness or a natural disaster might all be reasons you may need money right away.
What is an emergency fund?
An emergency fund is designed to keep your life intact during temporary setbacks and to help you avoid unnecessary debt. That means things like car insurance premiums and regular home maintenance (and other anticipated bills) should not be considered emergencies. The same is true of credit card bills for vacations.
How much emergency savings is enough?
In general, your emergency fund should cover three to six months of expenses. How much you’ll need will vary based on your financial situation, including the vulnerability of your income.
For example, a one-earner household is more vulnerable than a two-earner household when it comes to paychecks. So the one-earner family should generally set aside more for emergencies. Or if you don’t have disability insurance, you might consider setting aside a bigger balance in an emergency account.
Check with your employer about benefits
Some companies provide payment for accrued vacation and/or sick leave to laid off employees. If your company provides such benefits and you maintain significant balances in these accounts, you may not need as much in an emergency fund (at least to help you weather an unexpected layoff).
Here are a few items to consider as you plan your emergency fund:
- Consider your ongoing debt payments. Putting excess cash toward high-interest credit card balances might make more sense than funding a savings account that earns four percent interest. The best option is to put money toward both your debt and your savings.
- Determine what can be reduced and postponed. These may be items like retirement plan contributions, vacations and entertainment. Ask yourself, “How much will I need to cover my minimum monthly expenses without resorting to credit cards or lines of credit?”
- Don’t wait to start saving. You can start small and increase contributions as you receive pay increases or windfalls. The money should be liquid — easy to get at — so don’t put it in investments with withdrawal penalties. A savings or money market account is a great place to set aside cash for a rainy day.