I want to start an emergency fund. How do I calculate the appropriate amount to save and what items should I use it for?
An emergency fund is an important part of any financial plan and can be the difference between comfortably surviving an unexpected event and financial distress. A financial emergency can occur at any time and for a wide range of reasons. You may become sick or disabled, preventing you from working; your home may need immediate repairs; or you may be laid off from your job. An emergency fund ensures you can still afford your necessary expenses without needing to dip into retirement savings or take on additional debt.
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From a financial planning perspective, your emergency fund is a top priority and should take precedence over any other short-term financial decisions.
The appropriate amount to put into an emergency fund varies greatly depending on an individual’s unique circumstances. Cost of living based on geographic location, owning a home versus renting, debt balances, and family size can all account for different emergency fund needs. However, the general rule of thumb is a minimum of 3 months of expected living expenses if you are a dual-income household and a minimum of 6 months for a single-income household. In addition, add the amount of occasional expenses you expect to incur during the 3- or 6-month time period; for example, if you know you have to repair a car or make a home improvement.