Emergency fund: Why you need one
The reason to have an emergency fund is simple: You don’t know what’s going to happen in life. Money magazine states that 78% of us will have a major negative financial event in any given 10-year period. You need to have cash ready to help you survive when that happens. The account set up for emergency funds should contain enough money to cover 3 to 6 months of living expenses.
These unexpected events can be stressful and costly such as the loss of a job, an illness or a major repair and maintenance. The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses as well as reduce the need to draw from your 401k or a credit card which are very expensive financing options.
If you are part of a two-income household or you’ve had a steady job for several years, then a 3-month emergency fund is probably fine. However, if you are a one-income family, or a self-employed, then a 6-month emergency fund is a better idea because a job loss would mean you couldn’t pay the bills.
Your emergency fund should be liquid, meaning you need to keep it in a place where you can get to it easily and quickly. The best option is a simple checking account or money market account that comes with a debit card or check-writing privileges. Although the emergency fund may not earn you interest, it’s giving you peace of mind. You sleep better at night when you have cash saved. That is a great investment return on your money!