What is an Emergency Fund?
An emergency fund is a set aside savings that is equal to 3 – 6 months of your income.
The reason it is based upon your income is because in-case of an emergency it will fit your budget and your lifestyle.
It’s important to note that this is expenses and not 3 to 6 months of income. This savings is to make sure you can cover your bills if the need ever arises that you find yourself without income.
What If You Are Still Paying Off Debt?
If you are still in the process of paying off your debt, then it’s best to have at least $1000 in your emergency fund as a starting point.
Once your debt has been paid off, then start building your emergency fund further to reach the 3 to 6 month of expenses mark.
How Many Months Should You Save?
With an emergency fund having a range of 3 – 6 months of your income, this can seem a bit confusing.
If you are someone who is a freelancer or contractor, then it is best to go with the higher range of 6 months.
If your paycheck is steady then 3 months might be ok for you.
Personally, I’m a worry wort, so I keep the 6 months with hopes of saving 12 months, because you just never know what might happen.
What is an Emergency Fund Used For?
Emergency funds are there for instances that income stops coming in, or you get sidelined by a huge expense that was unexpected.
It’s very important here to note that “unexpected”. This fund is not for your yearly big bill you knew was coming up. It is for things that are just that unexpected.
Some examples of what an emergency fund is used for:
- Job Loss
- Accidents
- Car Trouble
- Unexpected Death in the Family
- Unexpected Medical Expenses
- For Times Between Job Contracts
- The Need to Move for a Job or Family Needs
- Uninsured Home Damage
Your emergency fund is there to help you cover things that will pop up in life. Where many people would use credit to pay for these expenses, you won’t have to. Your emergency fund will be there to keep you from going into debt.
Just make sure that if you do need to dip into your emergency fund that you work on building it back up to the 3 to 6 month mark as soon as you are able to.