Do I set aside six months’ worth of paychecks or the amount of my bills for six months when it’s time to save up my fully funded emergency fund?
In my plan, Baby Step 3 is when I advise people to save up three to six months of expenses in a fully loaded emergency fund. This is set aside and not touched for any reason other than a true emergency.
It’s not a Bahamas fund or a new living room furniture fund. It’s an emergency fund. It’s not an investment or fun money; it’s insurance. Think of your emergency fund as a protective barrier that keeps you from going into debt or cashing out investments when life throws bad things your way.
How do you decide where to land in the three to six month range of expenses? That depends on how much risk your household has. If there’s only one income in the equation, you have more risk, so you should skew things toward six months.
Being self-employed or a commissioned salesperson is also a situation where this would be true. If there are two incomes, and both come from steady, dependable sources, you could fall into the middle of that range or even more toward the three-month side.
Make sure your emergency fund is easily accessible too. A simple money market account with check-writing privileges works fine. You want to make sure you can get your money quickly when the need arises!