An emergency fund is an essential part of your personal finances. Its importance is stressed in almost every personal finance book and budgeting blog, and yet 26% of Americans currently have no emergency fund in place.
Of those who do have an emergency fund, up to two-thirds do not have the often-recommended six months’ worth of expenses saved up.
If an expense is unexpected (or it results from an unexpected circumstance) and it has the ability to derail your regular cash flow, then it’s an emergency expense. By that definition, a delayed insurance reimbursement is as much of an emergency expense as a meteorite landing on your car. The important part is being prepared for those expenses, no matter how mundane or how extreme they turn out to be.
How much money should be in your emergency fund?
Emergency funds vary widely from person to person. The regular recommendation is six months’ worth of expenses, but some prefer having nine months’ or a year’s worth tucked away. It’s a significant amount, as it should be—it’s what you would be living off if you didn’t have an income for an extended period of time. Whatever amount you choose, it’s a hefty savings goal and it will take time to meet it, but it will make all the difference in tough times.
Ultimately, your emergency fund is about your peace of mind. Design it to fit your specific needs.