It’s an ordinary day — and then the building where you work is hit by a tornado, suffers an explosion, or disappears in a hurricane.
It happens. In fact, it happens more often now than it used to. If it happens to you, you’ll be thankful that you have an emergency fund.
Emergency funds are savings, not investments, that are completely liquid and ready for you to use in the event that you need them. These funds not for things like buying a new car but are for events like unemployment, unexpected illnesses, tornadoes, or other events that impact your finances to the point of disrupting your income.
Emergency funds aren’t tied up in things like equity or investments. If you had to access the money right now, you’d be able to, without having to write against your equity, wait for a mutual fund disbursement, or pay penalties for withdrawing the money early from a retirement account. The times when you need to access emergency funds might make it impossible to access anything more than a savings account.
Knowing how much to save in your emergency account is part of your financial plan. Experts vary widely on general advice for how much you need in an emergency fund. For instance, some experts say you need to save up $6,000, others say three months of living expenses, and more conservative ones even say a year. It all depends on your particular income, debt, and investment levels, as well as how many dependents you have to support in the case of an emergency.
If you’re trying to pay off debt at the same time as saving an emergency fund, it can be a struggle to decide how to balance it out. On the one hand, if you don’t save for an emergency fund, you might default on your debts later. But if you don’t pay them down as much as you can now, you’ll be paying more on them than if you paid well over minimums.
Things can get really complex when you try to think about all the different factors that can affect your emergency funds. Speaking with a financial planner, however, can help you sort it all out and set goals for your emergency fund savings.