An emergency fund is a cornerstone of your financial safety net and will serve you when what can go wrong, does.

But how much should you keep in an emergency fund? And is it ok to keep your emergency fund anywhere besides an FDIC Insured deposit account? Should you prioritize other goals before starting an emergency fund?

Let’s find out.

How much?

“How much should I keep in an emergency fund?” This is often the first question I get on this topic. 

This amount differs from person to person and might range anywhere from three to 12 months’ worth of living expenses.

Here’s how to figure out your target emergency fund balance.

First, figure out how much it costs you to live each month.

Next, consider how much risk is inherent in your life.

A dual income household, with high job security, and no children may not need to keep much in an emergency fund.

 A single income household with low job security, children, and pets may need to keep much more in an emergency fund.

Don’t forget to factor in risks like a major health event, disability, or major repair.

The higher the level of risk in your life, the more you should keep on hand.

Start with three months of living expenses and add to that until you feel confident that you can weather more than one unexpected expense at a time.

Where?

The answer here is simple and universal. Your emergency fund should be in cash and be covered by FDIC Insurance. 

It is never appropriate to invest your emergency fund in a risky investment.

Why? Because your emergency fund is there to bail you out when things are bad. If things are bad and your emergency fund is invested in a risky investment, that emergency fund might not be there when you need it.

What about other goals?

While it is not sexy or glamorous, building an emergency fund is fundamental to your financial health and to reaching your other goals. 

Having an emergency fund can help you avoid debt and avoid dipping into long-term savings for emergencies. Debt can make it difficult or impossible to build wealth and pulling money out of a long-term investment account like a 401(k) or IRA can be costly.

What if you already have debt? Most of us do. 

Always pay your bills in full, on time. But don’t pay extra on your debts until you’ve got at least one month of living expenses in cash. Being able to weather even a small emergency with cash from your savings can help you find your way off the debt treadmill.

Whether you are just starting out or have been managing your own money for years, it’s never too late to build and maintain an emergency fund.

Your future self will thank you.

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