As a tool to protect your good credit, you'll need to build up an emergency fund. The emergency fund is a cash reserve that acts as padding — if you get hit with an emergency, your emergency fund keeps it from hurting too bad. As mentioned above, it helps you stay out of debt and stay current on your obligations. Your emergency fund is what you would dip into if you should lose your job or if you have to pay for something expensive. It is not for expensive toys or luxuries; rather, it is for expensive necessities like home repairs, medical bills, and auto repairs.
How Much for an Emergency?
The size of your emergency fund depends on a variety of factors. As a general rule of thumb, you might try for three to six months of your living expenses. Your fixed expenses will give you an idea of what your living expenses are, but you may want to build in a little extra by looking at your variable expenses too.
Three to six months of living expenses is a pretty broad range. Where should you fall into that range? It depends on how secure you feel. If you feel very secure in your job, or your ability to get another job if your current job ends, then you might be fine saving up three months of living expenses. In addition, if you are financially secure, meaning you are not living paycheck to paycheck, you can probably afford to build up a larger emergency fund.
Your emergency fund is a crucial tool for protecting your credit. It allows you to stay current on your debt payments if you lose your job, or worse. It also allows you to minimize the amount of debt you take on if something expensive happens. Making payments on time and keeping your debt balances low help to keep your credit healthy.
Your First Emergency Fund
If you are just starting to build your financial foundation, your emergency fund will probably be smaller than three to six months of living expenses.
About $1,000 is a decent place to start if you are currently stretched thin. It is more important to pay down your revolving debts than to build up your emergency fund. Once you get those balances down, you can start building up your emergency fund to a more appropriate level.