An Emergency Fund is a stash of liquid assets that can be used in the event of financial hardship. This should be 6 or more months worth of savings in an account you can access within 24 hours. Do not make this part of your checking account that is linked to your debit card! This should ideally be in a Savings or Money Market account that you can withdraw from without penalties. There should be enough cash in this fund to pay all of your bills and variable expenses such as gas and groceries for at least 6 months. If your just starting to build an Emergency Fund don’t worry about stashing every penny you have, just make regular deposits that you can afford.
Make a promise not to withdraw the funds unless an “emergency” arises. It is also important to make a mental list of what situations are emergencies and which are not. Any new purchase is typically not considered an “emergency” unless it is replacing a need such as your refrigerator quit working, or your car got totaled. An Emergency Fund is not used for a new wardrobe, a good deal on a new sofa, or even a much needed vacation.
Dedication and self discipline are important when building and keeping an emergency fund. When you have reached an amount that will cover 6 months worth of living expenses keep saving until you reach 9-12 months. This is the ideal fund which can stretch to last 12-16 months if you make careful purchases during a hardship. After fully funding your emergency stash then it’s time to direct your monthly contributions to a retirement account and/or debt repayment.