Emergency Fund: Why You Need One

As a financial planner, I encourage my clients to have an emergency fund.  This is especially important for WAHMs and other solo professionals who rely on their business for their main source of income.

I’m often met with the following questions when I recommend an emergency fund:

1.  Why do I need an emergency fund? and
2.  How much should it be?

To answer the first question, you need an emergency fund for the following unexpected expenses or situations:

* Car repairs
* Home repairs or improvements
* Job loss (spouse)
* Business slowdown due to illness or other unexpected events
* Unexpected medical expenses

By having an emergency fund, you won’t be forced to turn to credit cards to pay for these unexpected bills.

The general rule of thumb is to save between three and six months of your living expenses in an emergency fund.  If you are self employed, or if you (or your spouse) are in a job where your income fluctuates a lot, you should aim for a six month emergency fund.

Finally… you should have your emergency fund in a money market account (you might even keep a portion in a CD) to earn a higher interest rate than your checking or savings account.