Tank #4: Grow your Emergency Fund to Cover 3-6 Months
Freedom is close. You can taste it. You’ve paid off all your bad debt. It’s a huge accomplishment. Don’t downplay it. Tell the world. Celebrate. Party like a rockstar. Just stay within the budget.
Now, it’s time to build your emergency fund to cover 3-6 months of core expenses. A 1-month fund prevents you from going into debt, but a 3-6 month fund is like a life vest for your finances. The specific amount recommended for you is based on your risk factors. For example, if you have low job security or a high chance of illness, you should have closer to six months put away. If you have high job security and a low chance of illness, three months may be fine. Be conservative. More savings are always better than less. And, since you no longer have bad debt payments, you should have more monthly financial fuel to build your fund!
Here are a few additional details on Tank #4.
Where do I invest it?
Put a month’s worth of expenses in your checking or savings account (where it can be immediately accessible). Put the remaining in very low-risk investments such as money market accounts or bank certificates of deposit (CDs).
When do I use it?
When you have an emergency. You will get a flat tire. Your roof will spring a leak. You may lose your job. Your spouse may get ill so you need to take time off. Life happens. It’s unpredictable. A full emergency fund removes at least some of the resulting financial stress.
What do I do after I use it?
Replenish it. If you use $500 from your fund, put it back before moving on with your plan. You will refill your emergency fund multiple times in the early part of your journey. Eventually, you’ll have enough saved beyond the emergency fund so that you’ll never touch it.