Why Do I Need an Emergency Fund?

The following video is part of our "Motley Fool Investing Basics" series, in which Motley Fool contributor and financial planner Dan Caplinger discusses topics from around the investment world.

Today, Dan looks at the importance of maintaining an emergency fund to cover unexpected expenses. Although rules of thumb suggest that having enough money to cover three to six months of expenses is ideal, Dan believes that you have to balance your need for having cash available in a pinch against missing out on better long-term investing opportunities. In particular, with many employers offering 401(k) matching contributions, taking some money that you'd otherwise put in an emergency fund and instead putting it in a 401(k) may allow you to get essentially free money from your employer. Dan finishes by recommending that even if you can't put huge amounts into an emergency fund, every penny counts and can help you avoid getting into a financial hole that's nearly impossible to get out of.

Once you have your emergency fund set up, the next step is figuring out a strong long-term investment plan. Our special free report "3 Stocks That Will Help You Retire Rich" can help, with general advice along with specific guidance on some promising stocks to build wealth. Click here to keep reading.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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