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February 4, 2011

The need for a stable, liquid account

Everyone should have an emergency fund.  The amount, however, varies from person to person.  Try to identify the reasons that could cause you to need immediate financial resources.  Then, try to think of things you did not consider.  No matter how many events you considered, there are more you did not consider.  Yes, I did read the “Black Swan”.

You then need to consider the amount needed.  If you maintain a budget, you can quickly identify the expenses that you would have to cover.  The obvious types of expenses include: utilities, rent/mortgage, loan repayments, food, etc.    

Subtract the stable reoccurring items of income.  Before you consider your wages as a stable source of income, consider that a reduction or loss of wages is one of the events that require a reserve fund.  For some, the reduction or loss of a bonus could be a reason to have a reserve fund.

A common rule of thumb is three to six months of liquidity

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