An emergency fund, also referred as a rainy day fund is a cash account that you should set aside to meet unanticipated cash needs. These could be a sudden illness with medical bills, car/home repair, major appliances that quit working or a job layoff. Even if you are not worried about these expenses, an emergency fund provides peace of mind. The amount in your emergency fund is typically specified in multiples of monthly living expenses or income e.g., 3 months to 12 months worth of living expenses or income. A good rule of thumb also is $12,000 per adult living in the household. Either way, save regularly, save automatically, and don’t touch it!
Build a financial “safety net” with saving a percentage of your paycheck in an interest-bearing savings account.
Initially, it’s best to start small with a “cookie jar” amount of $500 to $1,000. Once comfortable, increase to 3-6 months and even the full 12 months if possible.
This fund should be liquid and immediately available for EMERGENCIES so you do not have to dip in to your retirement investments. Do not touch it unless it is an emergency! Avoid having access to it via a debit card and/or checkbook. If you get them with the account, hide them or destroy them.
One of the easiest ways to do so is by setting up automatic withdrawals from your paycheck. Even if you start with a small sum, say $100 a month, it’s worth getting into the habit of “paying yourself first.”
You can also have too much money saved for emergencies. It doesn’t happen often, but it is possible. If you have more than 12 months savings in your emergency account, then start thinking about investing.