Putting money aside for life’s little (and big) emergencies is an important part of good financial planning. But how much to save depends on several factors.
The general rule of thumb is to set aside 6-12 months of income in an account that is very safe and very accessible, such as a savings, checking or money market account. CDs will also suffice if you don’t mind paying a penalty for cashing them in early should you need the money (the penalty is usually several months of interest.)
The amount that is appropriate for you depends on a few things. How secure is your job? If you have a contract that ensures you work, or are in a high-demand occupation you may not have to worry much about losing your job. Setting aside enough to cover the purchase of a furnace or to repair the roof may be enough for you. If, on the other hand, you feel very unsure about how long you might have your current job then you should set aside at least 6 months of income, and preferably 12 months worth.
How important is your income to your lifestyle? If you are not the major breadwinner of the family, or have other income that could cover expenses, then you can back down to perhaps 3-6 months of income.
How much are you willing to cut expenses if you lose your job? The more you can cut back, the less you need and the less you have to have in your emergency account.
No matter how secure you feel in your job it is wise to keep some money on hand for unusual and unforeseen expenses, so that you don’t have to sell investments or take out a loan if you need some extra cash.
Even in retirement it is wise to keep an emergency fund going. Having 1-3 years of estimated living expenses in liquid investments (cash, bonds, money market or CDs) means that you can wait out a market downturn without having to tap into your accounts for cash.
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