Building an Emergency Fund

Everyone should have an emergency fund. You won't know how much your fund should be unless you know what your basic monthly expenses are. Here's where a budget comes in handy. If you've already prepared a budget as outlined in Chapter 2, you have a good feel for how much you need in your emergency fund.

Financial advisors suggest having enough savings in an easily accessible account to cover your living expenses for three to six months. Having this financial safety net will give you peace of mind about how you'll meet your most basic financial obligations in the event of illness, job loss, or other serious emergency. The fund can also be used for unplanned expenses such as major house or car repairs, or medical costs not covered by insurance. If you're uncertain about your job and the job market, an emergency fund is especially important.

Now that you have a budget in place, you can easily calculate how much money you'd need to cover your basic, no-frills living expenses if you had a sudden loss of income. Write down your goal for your emergency fund and decide on an amount to contribute to it each month, using the “pay yourself first” rule. If possible, keep the fund in a separate account, such as a money market account, so you're less tempted to dip into it. Since emergency funds might be needed without notice, they should be kept in liquid accounts that are easy to cash in quickly.

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  4. Building an Emergency Fund
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