The Importance of an Emergency Fund

Less politely, they are called "F--- You Funds."

You need a minimum of six months, ideally a year, of liquid funds. This would be enough to cover your hard expenses if all of your income stopped: mortgage/rent, utilities, vehicle/transportation, clothing/laundry, medical/health visits and costs, groceries, necessary memberships and subscriptions, etc. You can get an over-estimate by looking at every outgoing payment out of your bank or credit union account for the past year, and totaling that up.

Why? Because your employment might change. Life changes. Emergencies happen. Disasters happen.

You want to have the fund in place so that if your employer(s) disappear, or become too much trouble, or decide they don't need you anymore, you can walk away and be OK. Do you know what it is like to be at a job mostly for the fun of it, knowing that if things are no longer fun, you can walk away and be OK? I had a time in my life like that. (Unfortunately, I made the mistake of marrying, so that changed.) Having an emergency fund doesn't turn a blah or lousy job into a fun one, but it does give you peace of mind and a lot of flexibility.

If you're truly living paycheck to paycheck, without an emergency fund, something is wrong. You need to change that somehow. Cut expenses. Get a raise. Get more work. Change jobs. Sell some of your stuff. If you have debts, pay those off, starting with the debt with the highest interest rate first.

You need to put aside as much money as you can on a regular basis until you have a full fund. Have it automatically move from your checking account to your savings account, if you can. Or into some relatively safe, liquid account like brokerage account. Once you do have that fund in place, consider continuing the diversions, to an investment account. Unless you're elderly or terminal, you should be investing and saving up. Think of it this way: plan, budget, save, invest, and insure.

Guys, this is much easier to do if you don't have a wife and kids for which to pay. If you have an emergency fund and you make the mistake of marrying, at least ensure, with a lawyer, that your emergency fund stays separate. It will help you if there is a divorce. Do what your lawyer says: Do not co-mingle that fund, do not spend it on stuff for your marriage, or for your wife. ALSO, if you get an inheritance, work with a lawyer to keep that separate as well. THAT can be your fund if you don't have one already.