Murphy’s law states “whatever can go wrong, will go wrong.”  I normally just fall back on the phrase “shit happens”.  Whether you live in a home or apartment or you are roaming around in your RV or boat, things are going to break and need maintaining.  We’re going to have accidents and we need to be prepared when we do. Life is going to happen.

Replacing a roof, fixing a broken car, shredding the sails of your boat, replacing a hot water heater… or even the unexpected surgery to remove your appendix is never fun.  Some can be planned for and some are going to catch you off-guard.

An emergency fund is money set aside for the unexpected.  Whether you’re 20 years old or 100 years old, everyone should have an emergency fund or a financial cushion when the unexpected happens.

Where should you keep your emergency fund?

My suggestion would be in a bank money market account. The key here is not getting the best interest rate on your money but the accessibility of your funds.  You want to be able to get to the money immediately. Please do not put your emergency fund in the stock market.  It’s simply too risky.  This money should be set aside for short-term unexpected needs and shouldn’t be mixed with your long-term investments.

How much do you need in an emergency fund?

Three to six months of living expenses should be enough to cover you.  If you have some semi-planned expenses coming up such as dental work or home repairs, then a six-month emergency fund might make sense.  If you live in an apartment and have a new car, then perhaps three months will be enough.  Take inventory on what could go wrong and that will help you determine whether you need three months or six months.  If you have a more mobile lifestyle, such as full-time RVing or on your boat, I’d recommend at least six months because maintaining and fixing these can get expensive.

Can I use my credit card or home equity line for my emergency fund?

I would not suggest going into debt to fund your emergency fund.  I’ve seen people do it before and they paid it off in a quick period of time.  I’ve also seen people do it this way and not pay it off quickly. Their debt continued to accumulate, to a point it was hard to recover from.

About twenty years ago, I had this couple (in their 40’s) come into my office to discuss starting an IRA.  They freely spoke about their debt: They were paying over 20% interest on a car, over 20% interest on three credit cards and had $3000 in the bank.  I asked them if an emergency popped up and they needed $6000, where would they get it from.  “We’d use the $3000 we have and then get the other $3000 from our credit card.” I suggested that they should start using the cash they had for an emergency fund and that I’d help them with a plan to pay down their debt. The wife offered up “So you won’t help us with an IRA?”  My response “I think you’d be better off financially having a cushion and getting your debt under control.”  She looked at her husband and said, “We are out of here and we’ll find someone who can help us with an IRA.” And off they went.  I’ve often wondered what happened to them?  My guess is they are probably still battling debt issues.

It’s not IF but WHEN. Something unexpected will come up and you’ll want to be prepared.  Having an emergency fund is an absolute must for everyone and it should be the first thing you take care of when looking at planning out your finances.  If you don’t have this piece in place, it can batter and beat down the other pieces of your portfolio to a point of no return.  In my opinion, it’s the most important financial account you can have.