Emergency Fund

Before you start investing any money, the first thing you have to do is start an emergency fund. An emergency fund, as the name suggests, will help prepare you for any unexpected bad things that might happen. If you lose your job or experience a medical emergency, you will be glad you had funds set aside.

An emergency fund should consist of about three to six months worth of living expenses in a safe, accessible savings account at a bank. Go back to the budget you created earlier, and add up all of your expenses. Multiply that by 6. That is how much you should have set aside in your emergency fund.

The goal of an emergency fund is to have immediate cash available to cover your expenses while you figure out what to do next. If you lose your job, an emergency fund will buy time for you to cut expenses and find a new source of income. Or if you have a medical emergency and can’t work, your emergency fund can help cover for you while you recover.

While an emergency fund is crucial to your financial well being, it is also important to not have too much in the fund. If you have more than 6 months worth of expenses saved, you should probably take some of that money out and invest it in something else that will create better returns, such as a Certificate of Deposit or Series EE Savings Bond.

Nobody want to go through a job loss or other emergency. But having that financial safety net can at least dampen the blow and get you back on your feet more quickly.