An emergency fund is a liquid sum of money that you don’t touch unless it’s an absolute financial emergency. Examples of financial emergencies would include a major home or auto repair, appliance replacement, loss of a job, or some type of urgent medical situation.
How much money do I need in an emergency fund?
Most emergency funds typically include 3 to 6 months of expenses, depending on your financial situation and risk tolerance. If you have high interest debts like credit cards (anything above 10% APR) you should prioritize paying that debt down first. A smaller emergency fund of $1,000 (or 1 month of expenses) should suffice until the high interest debts are paid in full.
Where should I keep my emergency fund?
If you currently have cash on hand for 3 to 6 months of expenses, move it into a safe, secure account that you can easily liquidate. Examples would include an FDIC-insured checking or savings account, or a certificate of deposit. It also makes sense to keep your emergency fund in a separate account so you aren’t tempted to spend the money — and you don’t want it to get comingled with your checking account. If you’re working towards building your emergency fund, start by setting aside a certain dollar amount each month and make it a part of your monthly budget.
What’s the purpose of an emergency fund?
The purpose of this fund is to create a net of financial stability and reduce your worry, anxiety and stress levels that can result from the unexpected. By having an available emergency fund, you don’t have to turn to credit card debt or borrowing money from friends and family. If you have to dip into your emergency fund for an emergency, great, that’s why it’s there! But afterwards, your number one priority should be replenishing it to the original amount. Once an adequate emergency fund is created and/or replenished, you can start tackling other financial goals and you will be well on your way to building wealth!
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