Don’t Forget to Include Upcoming Estimated Taxes in Your Emergency Fund

Money experts disagree on the specifics of emergency funds, but almost everyone agrees on what you should save for emergencies. Nobel laureate and “father of modern portfolio theory” Harry Markowitz offers his rule of thumb to save cash for emergencies.

You usually have to use cash to provide liquidity. For example, if you have a business (like mine), you need cash to pay bills if your income drops. There are many different perspectives on how much money you should keep in your accounts in case of emergencies. My rule of thumb is at least three months gross income plus enough to pay the expected estimated taxes.

This is consistent with the frequently asked advice to save 3-6 months of income in your emergency fund, but it adds a reminder for those of us who are self-employed. Don’t forget about taxes! He also talks about gross income, not spending, as some people use to build their emergency funds.

You will, of course, be safer, saving much more, but this is a good minimum to which you need to strive at first.

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