What would happen if you lost your job? Could you survive without your income for two or three months? For many people, it's a scary question. An emergency fund will help you feel better about the unexpected changes in life.
Money tucked in your emergency fund should be used only in emergencies. Redecorating the kitchen isn't an emergency, but replacing cabinets after a kitchen fire is one. A summer vacation? That's definitely not an emergency. Fixing your car when it strands you on the highway? That counts. Consider whether you need to spend the money in order to survive or simply because you want to keep up your lifestyle. There's a big difference.
Next, decide how much you should have in it. Deciding the exact amount of money to set aside is a personal decision that you should make based on your budget. A good estimate is enough money to get by for two to three months without any other income. Decide where you'll keep the money and what other spending you may need redirect to your emergency fund.
Saving may be difficult, but it's worth the effort. An emergency fund can more than pay for itself -- especially if it's the buffer that keeps a medical catastrophe from sending you to bankruptcy court. Read on to learn more about preparing yourself for a financial hardship.