In addition to creating a monthly budget, you should set aside money each month into your retirement savings, your rainy-day/vacation savings, and in your emergency fund. When it comes to planning for the unexpected you might be wondering how big your cash cushion should be?
Suze Orman Weights In
Most financial advisors suggest that your emergency fund should be at least 3 to 6 months. This number was once one financial expert Suze Orman agreed with, but not anymore. With job markets in rapid flux in some areas it can take up to a year to find a position with a comparable income, or you may not be able to find a job with a comparable income. For this reason, Suze now suggests a full 12-month cash cushion.
Cash Is Key
Ideally, credit cards should be reserved for emergencies, like your car breaking down or an unexpected medical expense. However, your emergency fund should be all in cash. The reasons for this are many, including some things require cash to be paid—and because the last thing you want to do when you have less money coming in is to create more debt.
In addition to your emergency fund pay off as much of your interest accruing debt as possible.