An Emergency Fund is an amount of money you wish to retain in your cash account as easily accessible emergency money. It is suggested that you have at least a six month emergency fund. This is determined by multiplying your basic monthly expense by six months.
A cash emergency fund gives you added security for situations that require immediate availability of funds to cover an unplanned event. The beneficial reasons to have an emergency fund are numerous. Besides being able to cover an unexpected expense, an emergency fund reduces the likelihood of having to obtain needed cash from other expensive sources. Payday loans with interest rates of 400% should never be an option that anyone should ever consider. And, charging an emergency to a credit card and not paying it off right away can cost 16% to 25% in interest that compounds monthly.
When an unplanned event does occur, the emergency fund should be replenished from other non-liquid funds or income sources as soon as practical. An emergency fund should not be considered as a slush fund for other purchases not considered as an emergency. Examples of bonefied emergencies include:
Keep your emergency fund in a cash account that earns the highest interest you can obtain through your bank or credit union.