Saving wisely: Emergency funds | Budgeting & saving | Financial Literacy | Khan Academy

In life, there are things that we expect, and there's other things that we don't expect. When we think about it from a finance point of view, the things that we might expect is, okay, we're going to get a regular paycheck because of our work, and we're going to have regular payments for things like our rent or maybe our car payment or insurance.

But then there's the unexpected things that, for the most part, most of us wish don't happen. I guess there could be unexpected positive things as well, but unexpected negative things are maybe your car breaks down. That's pretty important because your car breaking down isn't just a nice-to-have thing or a nice thing to fix; you probably need your car to get to work and make your money.

You might have an unforeseen medical expense, for you or a family member, that you have to pay. It could actually affect how much income you or your family is able to get if you have to take off of work because of that medical event.

And so because of that, it is very good to save for a rainy day and have that emergency fund. Now, most experts will tell you that you should have an emergency fund that's equal to about three to six months of your needed expenditures.

We've talked about the 50/30/20 rule, which is 50 on needs, 30 on wants, and 20 of your after-tax income that you're bringing in for savings. That savings, first and foremost, should be for an emergency fund until you have a nice emergency fund. Then you could think about other things.

So, let's say there's a situation where your needs are two thousand dollars a month. You know that's your rent, your car payment, your insurance, your groceries—the core groceries that you really, really need. If it's two thousand dollars a month, then an expert would say, "Hey, you need three to six months there," so that would be six to twelve thousand dollars of an emergency fund.

If, for whatever reason, you lose your job, your car breaks down, or you have to help out a family member, then you're going to have some reserves to be able to weather that actual storm. Now, above and beyond that, obviously, it's even better to save, and then you can also think about that as even a bigger emergency fund or even put it in other places.

But it's really important to keep this type of money around; otherwise, yeah, you could find yourself in a tough situation.