An Emergency Fund is simply cash that you set aside to cover the unexpected surprises that life can throw your way. Having money set aside for surprises helps you to get through short-term emergencies without jeopardizing yourself long-term. As the saying goes, Hope for the best, but plan for the worst. Your emergency fund is exactly this - by planning for emergencies, it gives you peace of mind knowing that you are financially prepared for whatever life throws at you.
Some of the most common emergencies that people face include:
It is generally recommended that you keep 3 to 6 months worth of living expenses in your emergency fund. How much you should stash away depends on your personal situation, including how stable and in-demand your job is and how easily you can save up money with your current income. If you have a highly secure and stable job like working in government or healthcare, then you may be comfortable with a shorter runway for your fund than someone working in a more volatile industry.
The Covid-19 pandemic made clear the importance of having a robust emergency fund as it caught workers off guard when travel and entertainment ground to a halt in 2020 and millions were laid off with very little notice. Personally, I recommend aiming to build up a 6 month emergency fund to start and working your way towards a 12 month stash. The peace of mind that comes with knowing you could go without a job for an entire year is a huge relief from the day-to-day stress of life.
This interactive calculator makes it easy to calculate and visualize the savings you should have in your Emergency Fund based on your current monthly spending. Simply fill in the inputs with your monthly expenses and then adjust the runway length as desired, then the graph and results will update automatically.
It's important that you put your emergency savings in the right place so that your money is easily accessible in the rare case that you do need it. Here are some things to look for when you park your emergency fund:
In general, checking and savings accounts are the best options for your emergency fund and meet the above criteria.
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