Setting the Size of Your Emergency Fund


There are many opinions on the ideal size of an emergency fund but most experts recommend that you have enough money in your fund to cover 3 to 6 months of your expenses.  Instead of adding up all your monthly expenses, it’s easier to figure out your monthly take-home pay and then multiply it by 3 or 6 months.  For example, if your take-home pay is $1,000, your emergency fund should be $3,000 to $6,000.

Before you set a higher target for your emergency fund, remember two things: (1) While you are building up your emergency fund, you will have to postpone other, very important saving activities; and (2) Your emergency fund won’t be earning much interest because you need to keep it in a savings account where you can easily get your cash in an emergency; you don’t want to tie up too much of your money in such a low-interest account.

To explore the situations where a larger emergency fund would be a good idea, check out this post:

http://wheresmytrustfund.com/2010/12/06/should-you-have-a-larger-emergency-fund-given-the-current-economy-3-questions-to-ask-yourself/.

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