Ok – I know I’ve talked about the need of saving for your golden years (401(k)s and Roth IRAs), but this is a stash of funds you must have!
One of the most important accounts you must establish is an emergency fund. The purpose of this account is to always be prepared in case of an emergency. Emergencies can range across the spectrum from replacing a tire on your car to unexpectedly losing your job. :-(
From the smallest emergency to the largest, please be prepared.
Rule of thumb:
- If you are single or have a single income household then it is recommended to have an amount equal to at least 6 months of your fixed expenses.
- If you have a two-income household then it is recommended to have an amount equal to at least 3 months of fixed expenses.
- Fixed expenses are the expenses you have consistently every month. Fixed expenses include (but not limited to) the items below:
o monthly utilities (phone, internet, water bill, electricity, etc)
o Car note
o Insurance (auto, home, etc)
o Student loan payment
Where to start?
If you need a starting point - my good friend Dave Ramsey (no I really don’t know him, but love his book) suggest you should start off with a goal of saving at least $1,000 towards your emergency fund. My suggestion - if you already have over $1,000 set aside for emergencies, then start savings towards the larger goal of 3-6 months worth of fixed expenses. Also, this stash should be easily accessible/ liquid/ in cash.
You always want to be prepared! If you have a goal of paying off debt, you will not be able to accomplish this goal if every time an unexpected expense comes up you are swiping your credit card.
I encourage you to pick up a personal finance book, maybe Dave Ramsey’s book - The Total Money Makeover is a good place to start.
Step back and think about your financial situation as it looks today. If an emergency occurred today, big or small, would you be prepared?