Calculating your Emergency Fund

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CFP,  Alexa Von Tobel stresses the importance of maintaining an emergency fund or freedom fund throughout her tome titled Financially Fearless. You never know when a crisis is coming your way and she recommends at least six months worth of net income to help you smoothly deal with medical emergency and lost income from work missed.

The logic is based on one being used to a lifestyle supported by their monthly take home pay.  This does not, of course, include lifestyle choices that involve weekend jaunts to Acapulco or Ocean cruises.  So if you take home $1500 every two weeks, then your emergency fund should be approximately $18000 which represents a half year’s take home salary.

Be sure and keep your emergency fund in a liquid account so that funds can be withdrawn immediately without early withdrawal penalties. Mutual Fund withdrawals are fairly liquid, but some funds will impose an early redemption fee. Most FDIC insured savings accounts only pay around a tenth of a percent these days, but provide a safe 100% liquid place to securely hold your emergency fund.

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