New Rules for Emergency Fund Savings
We are frequently asked, “How much money should I save in my ‘emergency’ fund?”
First off, let’s define what we mean by emergency fund. It’s your “just in case” savings account – in case you need money to pay for an unexpected major expense. For example, your water heater breaks, you need a major car repair, or have to pay for some expensive dental work. We’re not talking about emergencies such as fires, earthquakes, or power outages.
The old rule of thumb (embraced by many financial planners) was to keep six to twelve months' expenses in an emergency fund. This fund was defined by readily accessible cash, such as a checking or savings account. The rationale was simple: in case of a major unexpected expense, you would have immediate access to adequate cash.
Times have changed.