What is an emergency fund?
It's usually a cash based account that is easy to access in an emergency. Often it is a high interest savings account or a home loan offset account. It should be seperate from your day to day spending account.
How much money should you have in an emergency fund?
It depends on where you are on your financial freedom journey.
Just starting out? 1 to 4 weeks of living expenses or a week to a month of salary is a small enough goal that might give you confidence to try for bigger goals. It might help you focus on the budget or start the conversation of what does money/financial freedom mean to you?
Concerned about a redundancy or a hard job market? 3 to 6 months of living expenses might help with creating a bit of breathing room. It might help reduce the stress of day to day life.
Approaching early retirement? 1 to 2 years of living expenses could help you ride out the market if there is a downturn and you are more dependant on the market to fund retirement.
Some people might be more comfortable with a 5 year safety net if they are concerned that there could be another downturn like the 2008 financial crises.
A healthy emergency fund is often the first step people take towards financial freedom, but you'd be surprised by how many people still live paycheck to paycheck.
Even just taking this small step could put you ahead.
