We’ve talked about businesses needing an emergency fund to use as a safety net, but it’s also important for you, personally, to have an emergency fund. It can help you change your life for the better because when something unexpected happens, you won’t have to put the expense on a credit card, take out a loan, borrow from your retirement fund, or sell your belongings.
When you’re starting your emergency fund, you’ll want to put it somewhere where it makes more money, but is also easily accessible in an emergency (but not too accessible, or else you’ll dip into it to go out to a nice dinner or pay for groceries). So, you don’t want to tie it up in stocks or anything that has withdrawal penalties or tax consequences. Try something low-risk, like a savings account at your bank.
How Much Should I Save?
Your emergency fund can create some peace-of-mind for you, so how much you put in it will depend on what makes you feel safe and secure.
When you’re first starting your emergency fund, aim to save at least three months of living expenses. So, if you need $2,500 a month for rent, utilities, and food, then work toward putting at least $7,500 in your emergency fund.
After you’ve hit the three-month mark, work toward putting six months of living expenses in your emergency fund. In the case of our example, you’d work toward saving up $15,000.
Eventually, you can try to save 12 months’ work of living expenses (or $30,000 in this case). That way if something terrible happens – you lose your job, you have to go on extended leave due to a medical emergency, etc. – you won’t panic because you can scrape by for a full year.