Emergency Savings: How Much Do You Really Need?

Anyone remotely interested in personal finance should plan for an unforeseen event that could prevent you from earning money for a (hopefully) short period of time, because of job loss or any other unforeseen pothole in the old highway of life.

Your financial future could suddenly face a huge setback if you are ever forced to support yourself using high-interest credit cards. In a case like this, an emergency savings account could save your bacon. Finance experts will suggest that you keep in an easily accessed cash equivalent account three to six months of expenses. So make a list of what constitutes your monthly nut — rent, food, insurance premiums, car payment, Revolutionary War reenactor club dues, what have you — and multiply it by three and plan to have at the very least that magic number of dollars on hand. There are other factors that also may go into this equation — whether, for instance, you might have a spouse whose salary could carry you for a few months.

A word of caution: it’s not wise to keep too much of your savings available, since any money earning piddling interest in savings accounts or CDs, or collecting dust in your mattress, will not be out there enjoying the kind of gains available through investments in the equities market.