Emergency fund — an emergency fund is made up of savings to cover the cost of an unforeseen crisis, such as job loss or illness.
But how big should your emergency fund be? Financial pundits say you should have anywhere from three to nine months of expenses set aside in an emergency fund. For people who are self-employed, financial fitness is paramount – try striving for the six to nine months end of the range, given the calculated risk you take in starting a small business.
How do you calculate expenses for six to nine months? Traditional wisdom suggests keeping track of your household budget for about three months, then putting aside the amount you’d need to cover six to nine months. However, in a true emergency, you might be willing to forgo cable TV, restaurants, lattes, and other indulgences.