Emergency Fund
An Emergency Fund is a readily accessible savings reserve equal to 3-6 months of essential living expenses, designed to cover unexpected costs or income loss without requiring debt or liquidating investments.
Exam Tip
Standard = 3-6 months EXPENSES (not income). Self-employed = 6-12 months. Keep in LIQUID accounts. Build BEFORE aggressive investing or debt payoff.
What is an Emergency Fund?
A financial safety net providing liquidity for unexpected expenses or income disruption.
Recommended Amount
| Situation | Amount |
|---|---|
| Stable income, no dependents | 3 months |
| Average household | 6 months |
| Self-employed/Variable income | 6-12 months |
| Single income family | 6-12 months |
Where to Keep Emergency Funds
- High-Yield Savings Account
- Money Market Account
- Short-Term CDs
- Treasury Bills
NOT recommended: Stocks, long-term bonds, retirement accounts
Building Priority
- Start with $1,000
- Build to 1 month while paying minimum on debt
- Aggressively pay high-interest debt
- Build to full 3-6 months
- Then focus on investing
Study This Term In
Related Terms
Net Worth Statement
A Net Worth Statement (Personal Balance Sheet) is a financial snapshot showing total assets minus total liabilities at a specific point in time, providing the foundation for financial planning by measuring wealth and tracking progress toward goals.
Debt Snowball Method
The Debt Snowball Method is a debt reduction strategy where debts are paid off in order from smallest balance to largest, regardless of interest rate, providing psychological wins that build momentum.