Emergency funds are necessary. We all need to be prepared for those unplanned expenses that show up when we least expect them. Home repairs, illness, job loss —there are so many things that can happen at any moment. Are you prepared to handle them? An emergency fund will prepare you for those unexpected setbacks and reduce your dependence on borrowing money, most likely at high interest rates. It’s not a question of whether or not we need an emergency fund, but how much of an emergency fund we really need.
Decide How Much You'd Like to Save
$1,000, three to six months' living expenses, a year's wages—there are a lot of opinions out there about how much money you should put into an emergency fund, but the only opinion that matters is yours. Ask yourself how much you would need to have tucked away to feel secure, and make that the amount that you save in your emergency fund.
Calculate Your Monthly Expenses
Make a list of all of your regular monthly expenses—housing costs, food, utilities, debt repayments, transportation costs, insurance, and all of your other "must-pay" bills. If you need to cover $2,500 in monthly expenses for three months, you'll need to set aside $7,500 in your emergency fund.
Here’s an emergency fund calculator that may help you determine how much you should save for a rainy day.
Open an Account
Once you've determined how much you need to save, it's time to decide where you'll keep your money. Since you want your emergency fund to remain fairly accessible, a savings account, money market account, or short term certificates of deposit —make good sense. Any one of these accounts will give you the liquidity that you need, while still earning you some interest.
Determine How Much You Can Afford to Save
If you're like most people, it's going to take time to build up your emergency fun—probably even a lot of time. That's okay. The important thing is that you get started today. Look over your finances and determine how much you can afford to put toward your emergency fund each month. Even $10 a month will help, so don't worry if that's all you can afford to do.
Set up Automatic Deposits
Make saving easy by scheduling automatic deposits to your emergency fund. Then, sit back and watch as the balance grows month-after-month.
The bottom line, according to www.fidelity.com is that there are many other circumstances besides losing a job that could require having cash on hand—like natural disasters, unexpected child care expenses, or a surprise medical bill that insurance won't cover.
You may not be able to plan for all of them but protecting yourself with insurance, having ample cash savings that are easily accessed, and keeping credit available, just in case, make a good start.
That’s one reason that Fidelity suggests establishing an emergency fund and then continuing to save 5% of your after-tax income for unexpected expenses.
Read Viewpoints on Fidelity.com: 50/15/5: a saving and spending rule of thumb.
Everyone needs an emergency fund—no matter how old you are or what your income level is. And if you’re diligent about saving for it, you'll be ready for anything—rain or shine.