Building An Emergency Fund: Why You Need One & How To Fund It

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Your car breaks down, you lose your job, your water heater breaks, you can't find a job as quickly as you planned......Life happens and this is where your emergency fund comes in to save you.

"Having an emergency fund is essential and should be part of everyone's overall financial plans."

So what is an emergency fund and why is it important?

As the name indicates, your emergency fund or emergency savings is to help you weather unplanned life circumstances or emergencies. Having a stash of cash to fall back on when "life happens" means you won't have to rely on credit or rack up debt in order to resolve your emergency situation.

How much should you have in an emergency savings account?

Ideally, your goal should be to have 3-6 months of your essential living expenses in emergency savings. If you are single, the more you have saved the better, so setting a goal of at least 6 months would be wise.

If you are married or in a relationship where you have a second income to fall back on, then you can start with 3 months as a goal and raise it 6 months once you reach 3 months of savings. 3 months because there are two incomes and it is less likely that you would both be out of a job for the same amount of time, for example. However I will stress, the more you can save for emergencies, the better.  12 months would be amazing!

So how do you save that much money for emergencies?

Putting away 3 to 6 months of income for emergencies sounds like a lot but if you start with saving a little then you can save over time until you eventually reach your goal. Keep in mind that amount of money you are saving is to cover 3 to 6 months of your basic living expenses so your housing, your food and your transportation NOT your non-essentials and nice to have.

If an emergency comes up, you should leverage your emergency fund and then plan to replenish it later. The best way to save and meet your emergency fund goal is to include a category for emergency savings as part of your monthly budget that gets automatically transferred to an account you have set up strictly for your emergency savings.

Where should you keep your emergency savings?

Your emergency fund should be easily accessible and liquid so you can get to it when you need it without having to wait and without having to worry about how financial markets are performing. That being said, it shouldn't be tied up in the stock market or in real estate. An interest-bearing savings account or a certificate of deposit are good places to store your emergency money.


Having an emergency fund (along with the right type of insurance) is essential and should be part of everyone's overall financial plans. You don't want to ruin all your hard work of paying down debt and building of wealth by not being well prepared to handle an unplanned emergency.

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