An Emergency Fund. What is it and why do you need one?

An emergency fund is a liquid savings account in which you can easily access in the event of an emergency.  An emergency is something that happens such as losing a job, the dishwasher breaks, or you get an unexpected medical bill. An emergency fund is not "Oh look at the car, I need to buy a new car." or "That's a cute purse, I want that." It is for EMERGENCIES!!

Recently, my 2012 Jeep broke down.  The transmission went out and I was stuck on the side of the highway.  Luckily, it was covered by warranty. That didn't prevent me from dipping into my emergency fund.  I had to get my Jeep towed to the repair shop.  I paid $150 to tow my Jeep.  I didn't even break a sweat.  That is exactly what my emergency fund was for.  The best part is, my insurance company repaid me for the towing, so it was back up to its normal amount within two weeks.

Why do you need an emergency fund?
1.  An emergency fund will give you a sense of comfort.  It is comforting to know that in the event of an emergency I have some cash that I can use in my bank account to cover the cost.  I don't have to worry about my credit card limit or going further into debt.

2. It gives you a source to fund an emergency.  A majority of people that I talk to don't have any type of emergency fund.  They say that their credit card is their emergency fund.  To be honest...Three years ago, my credit card was my emergency fund.  And I used it as an emergency fund.  At the time I was a broke college student and bartending at a Golf Resort. I was driving to work and I rolled over something and got two flat tires.  I had no cash to pay for it and my credit card only have a $500 limit.  I had to go out and find two new tires for under $500, which wasn't too difficult but I just about maxed it out.  It was at that point where I decided I needed an emergency fund.  A credit card will only worsen your financial situation in an emergency.  How do you plan on

How much should be in my emergency fund?
Dave Ramsey suggests building a $1000 emergency fund until you get out of debt.  I personally did not feel comfortable with having only $1000 in my emergency fund.  Even though I have a steady job in the military, my wife and I felt more comfortable having a $3000 emergency fund.  This will allow us to fix our car if it breaks down.

After getting out of debt, Ramsey suggests building your emergency fund up to 3-6 months of expenses.  For us, that would be about $4,000- $7,000. We'll build up to about $7,000 once we get out of debt. But for now, we're comfortable with the $3,000.  It's enough to cover two months of expenses, or an emergency with our car.