The unexpected may happen at any time, and that is why it is important to save some money in case of an emergency. You never know what may happen to your job, family, or health, so it is financially smart to always be prepared.
An emergency fund, or rainy day fund, is a savings fund that you keep separate from your other savings accounts, and only touch when absolutely necessary.
How much to save?
The general recommendation is to save enough money to cover your living expenses for at least three months. If your job is less secure, if the economy is weakening and job layoffs are increasing, or if you are self-employed, then you probably should save closer to six months or more.
If you have other savings that you could tap into after your emergency fund, then you could adjust how much you need to save accordingly. For example, if you have retirement savings that you could borrow from, or friends and family that could lend you the money, then perhaps you only need three months of emergency savings.
Where to keep the money?
Money in the emergency fund should be kept in savings accounts that are easy accessible, such as a money market account. You should fund your emergency account before any of your other savings accounts.
If you don’t have the money right now to fund an entire emergency fund, that is ok. Start small and save a little bit from each paycheck, until you have built up the required savings. In the meantime, you may try to cut back on some other unnecessary spending to help.