Everyone should have an emergency fund for unexpected expenses. How much do you need, and how do you hold it?

How bad? The “accidental” extra two shouts because you got stonkered at the pub? The $300 to replace the washing machine motor that crapped out?

Replacing the couch that spontaneously combusted? (Hmm, maybe it was those candles.) Or replacing your car, which has been towed one too many times?

Unexpected expenses? No such thing. Disasters are completely predictable. Just blend two parts “Murphy’s Law” with one part “chaos theory”.

That is: Anything that can go wrong, will, and it will happen to you as a direct result of a butterfly in the Amazon doing a tiny poop on a tourist’s ice cream.

Bad stuff happens. To you. Randomly it might seem, but it’s not really. It will usually cost you money. Have a stash ready. For this sort of stuff, you probably need a few thousand bucks saved. Not a ridiculous amount.

Far more importantly, you need a real “emergency” fund. This is the one designed to cover you being out of work, potentially for months.

There are two parts to it.

The first part is savings. You should have around three months’ salary, which should cover most people. If you’ve got a mortgage, the best place for it is in the redraw or offset account. If you don’t, perhaps a high-interest online savings account. (If you’ve got more than that, invest it.)

The second part of your emergency fund is income protection insurance. For Gen Xers, this is crucial to cover mortgages and cost of kiddies. It won’t cover unemployment, but will protect you long-term if you can’t work, because of injury or illness.

Bruce Brammall is the principal adviser with Castellan Financial Consulting (www.castellanfinancial.com.au) and author of Debt Man Walking.