You've probably been told time and time again about the importance of saving money for a "rainy day." And it's sound advice when you think of what could happen if you suddenly lost a job or had an unexpected medical illness or injury. If you have money set aside to handle emergencies, you'll be better equipped to weather the storm.
But how much money is needed in your rainy day fund? Frequently, people underestimate what they really need to live on and may come up short when the chips are down.
The conventional wisdom has been to stash away enough so you can live comfortably for a period of about three to six months. But that may not be enough at a time when it's hard for unemployed workers to find jobs and out-of-pocket medical costs continue to skyrocket. Also, make sure you factor in expenses other than your fixed costs for a mortgage and monthly car payments. Utility bills, your cell phone plan and other costs can really add up.
It may be safer to set up a fund that you estimate will last nine months to a year.
Where should you keep the money? Most people use an account at a bank or credit union or money market fund. If you want to consider options that earn income, just make sure they're very low risk and that you can get the money right away in case of an emergency.