I’ve blogged before about your emergency fund, and you probably already know that creating yours should be an important financial priority.
So what is an emergency fund, exactly?
Ideally, your emergency fund consists of 6-8 months’ worth of real living expenses – enough to cover your bills, necessary expenditures, and realistic lifestyle expenses.
That being said, do what you can in terms of building your emergency fund: every dollar counts on a rainy day. Focus on building up your fund by consistently diverting a portion of each paycheck, and know that any amount – even if you haven’t yet hit the target of 6-8 months’ expenses – means you’re taking smart steps for your financial health.
What Your Emergency Fund Is
Your emergency fund is the smart financial step that lets you sleep easily at night. If an unforeseen situation arises, you don’t want to add the further stress of wondering how you’ll pay your bills. And you really don’t want to get stuck racking up high interest credit card debt to cover expenses.
Emergencies: You lose your job. You have a medical emergency. Your car breaks down and is the only way you are able to get to work. Your heating system breaks during freezing temperatures. These situations are unexpected, serious, and urgent.
What Your Emergency Fund Isn’t
Your emergency fund is not there to cover regular bills if you come up short—re-work your budget if necessary, because your monthly bills shouldn’t come as a surprise. Your emergency fund is not there to cover expenses that are irregular but expected, like property taxes (those come out of your budget, because they can be predicted and planned for). It is not your retirement savings, which ideally you’ve invested in the markets to grow and work for you.
Most importantly, your emergency fund is not there to cover non-essential wants. Hint: that destination wedding next month is not an emergency. Though you couldn’t predict your cousin would choose to get married in the Bahamas, the trip is a want – not a need.