The answer to that question can be summed up perfectly by Murphy’s Law: Anything that can go wrong, will go wrong. But even with that charming adage aside, you need an emergency fund simply because at some point you’ll probably have to use it.
The reasons for this are endless. Suddenly losing your job, your car breaks down, your house needs a major repair, you become responsible for a sick family member, and so on and so forth in a whirlwind of depressing scenarios. But not all emergency fund needs are negative. If you (or your partner) become pregnant or the opportunity to transfer to a new country for a job arises, these can be really exciting times that still require a financial buffer. Having an emergency fund will give you the peace of mind to accept the next steps of your life with some ease.
How much should you set aside?
The first thing you should do when deciding how much money to set aside is determine your job stability. Generally, the less job security you have, the more money you need to put away. Aim for setting aside about 3-5% of your income for a stable job and 5-10% of your income for a more unstable job. Another way to think about this is save three months of your salary for emergencies. Even better if you can save about six months of salary. No matter what comes your way, you’ll feel safe with some financial leeway.
Where do I hold my emergency fund?
Ideally, not lining the walls of your home. Put your cash in a checking or savings account, money market funds, or CDs. You may also want to put your emergency funds in bonds, but if you do, you’ll be incurring some risk.
There are no bad sides to having an emergency fund. Think of it like buying insurance. But since it’s your own money, you don’t lose it if you don’t use it. For you risk takers out there, if you’re comfortable with the amount in your emergency fund, you can add some stock.
Some people don’t use emergency funds and figure that if an emergency pops up they can always borrow money. However, if you have your own cash fund you can avoid any penalties, fees, and interest that may come back to bite you.
For many, it can be really unappealing to set aside money in an emergency fund. There will always seem like there’s a better use for the money right now. But making some sacrifices in spending now, if it means saving for the inevitabilities of future emergencies, will be more than worth it. That way, whatever Murphy’s Law throws at you now, you’ll be ready.
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