No one can predict the future. No one! That said, it makes sense to put aside money for a rainy day. This money should be kept in a separate savings account from your general savings. If you mix your emergency fund with your general savings, it’s just too easy to dip into it.
Saving for an emergency is better than taking out a loan or cashing in investments. If you take out a loan, you will have to pay interest. If you cash in an investment, you will lose interest and possibly some of the original investment.
Remember these points when building an emergency fund:
- Set aside enough to cover your basic living expenses for at least three months.
- Keep the money in an easily accessible savings account or money market account.
- Do not keep the money in a long-term investment asset, such as a stock mutual fund.
- Use the money only for true emergencies, such as unexpected medical bills. If you lose your job, you may need your fund for food, utilities, mortgage payments or rent, and necessary transportation. (Usually people can put off buying clothing for at least three months.)
Here’s How Much I Will Need to Keep in My Emergency Fund
| Grocery bill for 1 month ______ x 3 months = |
$__________ |
| Gas/oil, electric, and water for 1 month ______ x 3 months = |
$__________ |
| Mortgage or rent for 1 month _______ x 3 months = |
$__________ |
| Car payment or bus fare for 1 month _______ x 3 months = |
$__________ |
| Other debt payments for 1 month _______ x 3 months = |
$__________ |
| Total amount I will need to keep in my emergency fund = |
$__________ |