Importance
The emergency fund is a very important component of the Get Rich framework. This is the safety net that exists preventing one from falling into debt in case of emergency situations.
The following are some of the emergency situations that can arise:
- Sudden job loss.
- Unexpected home repairs like an HVAC or hot water heater breaking down, plumbing issues.
- Car repairs such as a failed transmission, battery replacement, car breakdown and the need to purchase another car.
- Sudden air travel for emergency situations.
- Out of pocket medical expenses.
How much is enough?
Initially I did not know how much to set aside for the emergency fund. Then I started tracking my expenses for over a year and had a separate category for unexpected expenses. For my safety net, I decided to have $5000 set aside. This is money that I will never touch unless in an emergency. When I use this money, the first thing I will do is to bring it back to $5000 before I set aside any post tax money for investing.
This is important!
One thing to understand is this is not the same as 3 or 6 month of living expenses. This is another category that needs to be set aside. This is for extreme situations like a sudden job loss and unable to find another source of employment. An emergency fund is to give a cushion against the sudden trials that life throws at you.