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Your emergency fund can help you cover the cost of lifes unpleasant surprises like medical bills, car repairs or even job loss. Without one, these unfortunate situations could be even worse, as you could face some tough decisions when things dont go according to plan.
Do you turn to credit card debt that carries a high interest? Do you dip into your 401(k)? Do you have to take out an additional loan on your home?
If you dip into savings during tough economic times, that can mean selling assets from your nest egg when the market is down or, alternatively, spending cash that could otherwise buy assets in your portfolio on the cheap.
Any of these steps will set you back in growing your net worth and hinder your ability to reach your goals. Thats why an emergency fund is something you need in place if you want financial security.
Of course, you probably knew that already. But do you know where to put that cash and how to set up your emergency fund so it works for you?
How Much Cash To Keep In Your Emergency Fund
An emergency fund should contain three to 12 months of living expenses. Within that range, the specific size of your emergency fund should correspond with your level of job security and the potential volatility of your income.
Doctors and tenured professors have more predictable incomes and could get away with keeping smaller cash cushions for emergencies. Someone working in an industry that is more sensitive to changes in the economy such as construction or finance, on the other hand, may want to maintain a bigger emergency fund.