Even if you have a great handle on your finances, unexpected challenges can come along that threaten your financial stability – losing a job, dealing with an injury or illness, or having to help a family member who is in need. If you’re not collecting a paycheck, or if you have large, out-of-the-ordinary costs to cover, that can throw your monthly budget completely off track.
The goal is not to touch the money except in a real emergency. If you have it at the ready when you really need it, ideally it will last long enough to get you back on your financial feet.
To create your emergency fund, multiply your monthly take-home pay times six to find the amount you should ideally save.
It’s usually not practical or possible to create a fully funded emergency fund in one shot. Instead, plan to add to it on a regular basis, in an amount you can reasonably afford, until it reaches your goal value. You might consider adding it as a line item in your monthly budget, just as you do when you put aside a percentage of your income to add to a savings account or your investment portfolio.
If you do have to dip into the fund, it’s important to start building it back up as soon as you have the resources to do so.