What is an emergency fund?
An emergency fund is money set aside to cover expenses in the event of lost income, or other unexpected expenses. Having an emergency fund enables you to navigate whatever life might throw at you without jeopardizing your financial security or goals.
What expenses can I cover with my emergency fund?
An emergency fund can cover both lost income or unexpected expenses. For example, if you were to lose your job, you would have to go without income for a few weeks, or maybe even a few months. An emergency fund could then be used to cover all of your basic expenses - rent, groceries, gas, etc. - until you find a new job. An emergency fund can also be helpful if something unexpected happens, such as your car breaking down, a trip to the ER, or your roof blowing off in a thunderstorm.
Having some money set aside in an emergency fund gives you peace of mind that you're covered in the event of an emergency. You'll be able to handle whatever life may throw at you without going into debt or otherwise jeopardizing your financial future.
How much should I have in an emergency fund?
It is typically recommended to have about 6 months of living expenses in an emergency fund. This is a good rule of thumb because it scales well with each individual's situation. Basically, if you have higher monthly expenses, it would be wise to have more money in your emergency fund. This is automatically reflected by multiplying your monthly spending by 6 months.
Look at your monthly budget to determine how much you spend every month.