Money experts don’t agree on the particulars of emergency funds, but just about everyone agrees you should save for emergencies. Nobel Prize winner and “father of modern portfolio theory” Harry Markowitz offers his rule of thumb for setting aside cash for emergencies.
Usually, you should use cash for liquidity purposes. If you have a business (like I do), for example, you need cash to be able to pay your bills if your income declines. There are a lot of different schools of thought on how much cash you should keep in your accounts for emergency purposes. My rule of thumb has been at least three months of gross income plus enough to pay imminent estimated taxes.
This goes along with the oft-given advice to save three to six months of income for your emergency fund, but it adds the reminder for those of us who are self-employed. Don’t forget the taxes! He’s also talking about gross income, rather than expenses, as some people use to base their emergency funds.
You’ll be safer, of course, saving much more than this, but it’s a good minimum to aim for at first.
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