All the experts say you need an emergency fund. Do I really need this if I have savings? We feel that an emergency fund is a protection against taking from your savings. If you have about six months of expenses saved up and something happens you will not have to rob your life savings to cover your expenses. An emergency fund also protects you from having to take unnecessary withdraws from your retirement funds as well.
Loss of job
A good reason for an emergency fund is loss of your job. Rather you lost your job for layoff, termination, voluntarily to keep your sanity, or any other reason the emergency fund can help as you transition from one job to another or as you take a break from working to regain your self.
A real emergency happens
Ever been in a car accident? Did you have the cash on hand to pay all the costs that were incurred, which could be medical bills, repair bills, lost time at work and more? This is a good case for an emergency fund. Even if you are being reimbursed, you can use the emergency fund to cover things and then when reimbursed pay back your emergency fund. I have never been through a house fire that did major damage, but this is another example. Lots of emergencies happen every day and we cannot plan for each individual scenario, so having funds set aside to help cover things is a great plan.
Goal for the Emergency Fund
Six months of expenses, all expenses is the common practice and the recommended minimum emergency fund. You do not need to have your full income for six months. You also have to look at the economy and see what is happening. If the job market is down, you might want to think about having nine or twelve months of expenses on hand. It is also a good idea to review at least annually as inflation happens and prices change. This month our expenses may only be $1000 a month, but a year from now it may be $4000 a month. We are all seeing price increases in things right now, so we have to recalculate and evaluate our planning. An emergency fund is like insurance, there if you need it, the difference is unlike insurance, you have control. Use it wisely.