Your Quick Guide to Emergency Funds
The following is a transcript of "Money Girl's Quick and Dirty Tips for a Richer Life," a podcast from QuickAndDirtyTips.com. The audio program is available via RSS feed here and at TheStreet.com's podcast home page.
Hello and welcome to Money Girl's Quick and Dirty Tips for a Richer Life.
Today's topic: How much of an emergency fund do you need?
A listener named Nick emailed me with this question about building an emergency fund:
I've often heard that, as a rule of thumb, you should have enough money in savings to live for three months. I don't have this now. Does it make sense for me to spend a few months building up my savings account while making minimum payments on debt, so that I have some reserves?Thanks for the question, Nick. So how much of an emergency fund does a person need and should you save up an emergency fund before paying off debt?
Everyone Needs an Emergency FundIf you don't already have one, start saving for one today. Not tomorrow. Today. Unexpected things can happen that may mean having to go without your income for awhile. You'll have peace of mind if you're prepared to weather a period without your usual income. Financial planners typically recommend creating an emergency fund equal to three to six months of living expenses. How much of an emergency fund you need depends on your specific situation. If you work in a thriving field where jobs are plentiful and easy to come by, you may feel comfortable with just three months of living expenses as your emergency fund. But if jobs in your field are few and far between, you might want a bigger emergency fund that you could tap into for, say, a year, if you were ever to find yourself out of a job. To figure out your emergency fund amount, add up your living expenses for a typical month. Then multiply that number by the number of months worth of emergency fund you'd like to have. That's the amount you'll want to save up.
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