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At LearnVest, we believe your emergency fund should contain at least six months’ worth of net income (up to a year is our recommendation if you have kids or other dependents), and you should only touch it in a true emergency (and no, your family vacation to Hawaii is not a true emergency).
This is a point that bears repeating: Unless there is a true emergency, it should sit patiently and liquidly in a savings account, waiting for you should you need it (God forbid).
While an ideal emergency fund is at least six months of net income stored in a savings account, it’s best to have upwards of nine months saved if your job is unstable or you work as a freelancer and have an irregular income. Are you in an unstable financial position? If so, aim for nine months to a year.
As I may have mentioned once or twice, the money in this fund is best left untouched unless there is a true emergency. Here are five examples of situations that qualify:
- Emergency 1: You’ve lost your job and need to continue paying rent, bills and other living expenses.
- Emergency 2: You have a medical or dental emergency.
- Emergency 3: Your car breaks down and is your primary form of transportation.
- Emergency 4: You have emergency home expenses. For example, your A/C breaks down in hundred-plus-degree weather, your roof is leaking, your basement is flooded (and no, a kitchen in need of redecorating doesn’t count, no matter how much you hate that wallpaper).
- Emergency 5: You have bereavement-related expenses, like travel costs for a family funeral.
Here’s another reason why you should always have money in a freedom fund: If you don’t, and one of these five types of emergencies arises, you’d likely be stuck using a credit card to handle it, leading you into (or deeper into) credit card debt. In fact, medical expenses are the leading contributor to credit card debt, with low-to moderate-income households averaging $1,678 in credit card debt due to out-of-pocket medical expenses.
Plus, paying for emergency expenses on your credit card (if you don’t pay off your bill immediately) will end up costing you more over time, as you’ll rack up interest payments as you try to dig yourself out of debt. Having a fund will not only save you more money in the long run but also give you peace of mind in knowing you have the safety net to catch those unexpected curveballs when they arrive.
If getting six months of take-home pay together seems daunting, here are eight tricks: