The emergency fund is probably the most important savings account. Think of it as self-insurance. You save for an unforeseeable event: loss of income, furnace goes, or the roof springs a leak. So how much do you need to keep in an emergency fund? It all depends on your comfort level and what you are saving for. You may even want to have different, targeted, emergency funds. Some people recommend saving for at least 6 months of expenses. Personally, with everything going on in the world, I would save for at least 12 months of expenses. This will give you some flexible time to look for another income.
My current emergency fund is for anything at this point in my life. Once I reach my ultimate goal of $20,000, I will set this account aside and name it the “Loss of Income Fund”. The $20,000 will keep my current lifestyle afloat for about a year. I may even open short-term CDs to make some more money rather than letting it sit at a lower interest rate. To keep my savings on track, I could direct the money a few ways:
- Keep putting money into the “Loss of Income Fund” after I reach my goal
- Every $1,000 I go over my goal, a 1-year CD gets opened
- Create a new emergency fund targeted towards another goal
- Maybe an “Emergency Home Repair Fund”?
- Send it to another savings account for non-emergencies
- Vacation fund
- Auto fund
- Save more towards my Roth IRA
I also use my emergency fund for when I overspend on my credit card the previous month. I refuse to maintain a balance on my credit card unless I have no other choice. Most of the items are unforeseen expenses and this is where it is very nice to have a fund to tap into.
Do you have an emergency fund? How do you use it?