Emergency funds

Everyone should have an emergency fund. I'll say it again: EVERYONE should have an emergency fund. A credit card is not an emergency fund. Your 401k is not an emergency fund. Your parents or adult children are not an emergency fund!

There are times in life when fate throws you a snowball. Sometimes it really is a snowball and you find yourself in the emergency room. Other times is a metaphorical snowball and you're out of a job or your car is no longer an automobile but a lemon.

So the money that you put away for a rainy day is there specifically for an emergency. Not for a vacation, not for an anniversary party (unless that really is an emergency but that's between you and your significant other) nor for anything that ranks less than a major therapy session.

So how much are we talking about? Most planners will tell you that 6 months take home pay is a good place to start. That's fine if you're George Clooney and you're making $20 million a movie. But if you earn closer to the median household income in America today (about $52,000) we're talking about $18,000 after taxes. That's not great but will certainly be a cushion if something were to go wrong. My personal view is that one should shoot for at least 18 months as a way to ride out economic or market tensions that might trigger one to consider doing something rash (like tapping investments).

Here are some thoughts on the matter: Emergency Savings