Creating Financial Stability Part II – Build An Emergency Fund

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This is the second in a four part series on what you can do to cultivate stability and peace of mind in your financial life.

Have an emergency fund.  It helps you meet any large unexpected expenses and ties you over in case of job loss or income reduction if you’re self-employed.  Financial pros often recommend having 3 to 6 months of expenses saved up.  You’ll have to look at your own situation to determine if that’s appropriate for you.

If you’re in a line of work where you’re in very high demand and you can easily find another job or customer, then perhaps you only need 3 months of expenses saved up.  But if you’re one of five paleontologists in the country, you should probably have one year of expenses saved up.

If you’re married, you should also look at your spouse’s work situation.  If they’re in a different field and their income stability and prospects are good, a smaller emergency fund for the family may be good enough.  If they’re in the same line of work as you and vulnerable to the same economic cycles, a larger emergency fund is necessary since you may both be out of work at the same time.

Keep your emergency money in a savings account or in cash equivalents such as CD’s and money market accounts.  Because you may need it at any time, you don’t want to invest this money in something that can fluctuate wildly in value or be inaccessible when you need it such as stocks or real estate.

Stay tuned.  In the next post I’ll cover insurance, another key to financial stability.  It may not be sexy or exciting but it is important.

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