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Life happens. We do our best to plan and then – wham! You get hit with an unforeseen car repair, a medical bill or perhaps a layoff.
That’s why financial planners recommend building up an emergency fund to protect yourself against things like lost wages or unexpected expenses.
But how much is enough?
The general rule of thumb is to have 3 to 6 months-worth of essential living expenses in your emergency fund.
Essential living expenses are defined as housing, food, utilities, car payments, etc. – in essence, anything that’s not a part of your discretionary budget. That means your emergency fund doesn’t have to have 3 to 6 months-worth of your salary, just enough money to make ends meet over the course of that time.
So how do you do save up enough money?
One idea is to put your emergency funds in a highly-liquid savings vehicle, such as a money market account. Money Markets generally pay more than a savings account with next day liquidity and can help you build up your nest egg faster.