What is an emergency fund?
An emergency fund is a bank account with money set aside to cover large, unexpected expenses, such as:
- Unforeseen medical expenses.
- Home-appliance repair or replacement.
- Major car fixes.
- And, costliest of all, unemployment.
Why do I need an emergency fund?
Emergency funds create a financial buffer that can keep you afloat in a time of need without having to rely on credit cards or take out high-interest loans. It can be especially important to have an emergency fund if you have debt, because it can help you avoid borrowing more.
How much should I save?
The short answer: Up to half a year of expenses.
The long answer: The right amount for you depends on your financial circumstances, but a good rule of thumb is to have enough to cover three to six months’ worth of living expenses. If you lose your job, for instance, you could use the money to pay for necessities while you find a new one, or the funds could supplement your unemployment benefits. Start small, Weston says, but start.
Having even $500 saved can get you out of many financial scrapes. Put something away now, and build your fund over time.
Where do I put my emergency fund?
A savings account with a high interest rate and easy access. Because an emergency can strike at any time, having quick access is crucial. But the account should be separate from a bank account you use daily, so you’re not tempted to dip into your reserves.
A high-yield savings account is a good place for your money. It is federally insured up to $250,000, so it’s safe. The money earns interest, and you can access your cash quickly when needed, whether through withdrawal or funds transfer.
How do I build an emergency fund?
- Calculate the total that you want to save. Use the NerdWallet emergency savings calculator below if you need help figuring out how to add up your expenses for six months.
- Set a monthly savings goal. This will get you into the habit of saving regularly and will make the task less daunting. One way to do this is by automatically transferring funds to your savings account each time you get paid.
- Keep the change. When you get $1 and $5 bills after breaking a $20, drop some in a jar at home. When the jar fills up, move it into your savings account. If you don’t carry cash, you could try a mobile savings app that makes automatic transfers, with rules that are based on the transactions you make.
- Move money into your savings account automatically. If your employer offers direct deposit, there’s a good chance they can help you break up your paycheck into multiple checking and savings accounts so that your monthly savings goal is taken care of without ever going to your checking account.
- Save your tax refund. You get a shot at this once a year at tax time — and only if you expect a refund. Saving it can be an easy way to boost your emergency stash. When you file your taxes, consider having your refund deposited directly into your emergency account. Alternatively, you can adjust your W-4 tax form so that you have less money withheld. Then direct the extra cash into your emergency fund.
- Assess and adjust contributions. Check in after a few months to see how much you’re saving, and adjust if you need to add more. This is especially important if you go through an expensive major life event such as marriage or a move to a new city, or have an emergency that causes you to dip into your existing fund.
When saving, draw a line between emergencies and everything else. In fact, once you’ve hit a reasonable threshold of emergency savings, Weston says, it’s a good idea to begin another savings account for irregular but inevitable items such as car maintenance, vacations and clothing. If you need help staying organized, many banks allow customers to create and label sub-accounts for different financial goals.
Everyone needs to save for the unexpected. Having something in reserve can mean the difference between weathering a short-term financial storm or going deep into debt.