Day 8: Check your Emergency Fund
Degree of difficulty: Easy
Before you begin saving for your financial goals, it's crucial that you build an emergency fund--a basket of ultra-liquid investments that you can tap in case you lose your job or confront an unanticipated car or home repair.
The typical rule of thumb is to keep three to six months' worth of living expenses in your emergency fund. But perhaps a better way to decide how much to store in cash is to think about how much of a cushion you'd like to have in case you lost your job. If you go through that exercise, you're apt to conclude that three months' worth of living expenses is nowhere near enough. But don't go overboard with your cash hoard, either. After all, interest rates on money market accounts and funds are about as low as they can go, so being too conservative has an opportunity-cost. As you calculate your emergency-fund requirement, don't use your real spending patterns to set your living expenses. Think about how much you could get by on in a pinch, excluding meals out, house cleaners, and holidays.
Compare your emergency-fund target with the amount you have saved in money market accounts and funds, and current and savings accounts. Don't include cash holdings that appear in long-term funds. Building your emergency fund up to your target level should trump saving and investing for other goals, such as retirement or a child's further education.
For more information, look at this lesson dedicated to building your emergency fund.
Return to the article: "The 30-Day Financial Fitness Plan".
