You know you need an emergency fund, right?
After you’ve paid off all of your debt, you need to stay motivated and frugal to save up a full emergency fund.
This is money that is sitting there not earning much interest, but keeping you from the edge of disaster. It needs to be money that you can get to fast! Some people have their emergency fund in a simple savings account or in a money market account. Others keep cash at home. If you keep your emergency fund in CDs or investments, there’s a good chance that you’ll have to pay heavy fees to liquidate it or it might even be gone when you need it.
Financial planners will tell you that a fully-funded emergency fund is 3-6 months of household expenses.
“Household expenses” means the irreducible bottom line that your family needs to survive: housing, utilities, transportation, and food. So maybe your normal budget is $5,000 per month. It wouldn’t be surprising if your monthly “household expenses” came in at $3,500 or less.
But there’s a huge difference between three months and six months.
How much should you actually save? Remember, an emergency fund is about managing your risk.