What is an Emergency Fund and Why it is Important

Howdy Wall St. Willy! I heard my parents saying they want to open an emergency fund. But what is an emergency fund anyway?

An emergency fund is money that you keep aside for unexpected expenses or if you lose your job.

Well how much money should I have in my emergency fund?

You should usually have 3 to 6 months of your expenses, which is the money that you pay for your bills.

Well, who should have an emergency fund? Everybody or just really rich people?

Everyone should. The amount that you have in your emergency fund might be different depending on your earnings and your expenses.

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Well, do I need a special bank account for an emergency fund?

No, you do not. You can just use your regular savings account for your emergency fund.

Well, what should I do first? Invest or start an emergency fund?

First you should start an emergency fund because, even though investments are for long term goals, an emergency fund gives you a lot of peace of mind, because you know that you have enough money to pay your bills even if things go wrong.

Can my emergency fund be in the form or stocks so that if the market goes up, I get more money?

No, your emergency fund cannot be in the form of stocks because if the market goes down and that is the time when you have one of your unexpected expenses or you lose your job, then you won’t have enough money to pay your expenses.

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Okay. Thank you very much for telling me about Emergency Funds, Wall St. Willy.

You are welcome, Sooper Cooper. Remember, Finance is Your Friend!

Podcast: What is an Emergency Fund and Why it is Important

Emergency Fund
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