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Part of improving your financial health is building an ample emergency fund. This money, set aside to help you weather bad times, is especially important when you're in danger of getting sick or losing your job. The fund is your fallback plan, and it's a good one.
Need a reason to kickstart your fund? Here's a great one: You can avoid debt. An emergency fund gives you another option when you need it most.
Strongly consider building an emergency fund if you have zero fallback plan for emergencies. At the very least, knowing you're on your way to financial security -- however slowly -- can bring you peace of mind. Don't stand still -- take action and feel good about it.
If you lack an emergency fund, not to worry -- we'll break down what an emergency fund is, why you need one, and how large it should be.
An emergency fund is money you earmark for emergencies. This money needs to be fairly liquid -- that is, you need to be able to access it quickly and easily.
Emergency funds help you overcome the following:
Sure, the fund can cover other types of emergencies. Your emergency fund exists to help you overcome unplanned events of all sorts. But an emergency fund should not be used to cover your semi-annual car insurance payments, or for holiday gifts. Those expenses are predictable, and payment should come from other sources.
Think of an emergency fund as a self-funded insurance policy. The policy covers you when you're in a pickle. But instead of paying an insurance company for coverage, you're paying yourself forward.
Example No. 1: Job loss. You lose your job. You draw from your emergency fund to pay living expenses until you find another source of income. You have enough saved to maintain your typical living standards for three to six months -- longer, if you reduce expenses.
Example No. 2: Car repairs. You know your car is going to rack up a lot of mileage. You contribute to your emergency fund in anticipation of expensive mechanical issues down the road. When the bill comes due, you're able to pay it without selling long-term investments or taking out a loan.
An emergency fund is especially important when you don't have family members who can help you in a pinch. Feel safe knowing that if you need cash quickly, it's there, ready for spending.
Many things, such as income and recurring expenses, determine how much you need saved in an emergency fund. Most experts recommend setting aside three to six months' worth of expenses. However, if you have a job title like freelancer or gig worker, or you work on commission, you might want to set aside even more.
To figure out the exact amount you need, add up necessary monthly expenses like rent, utilities, and food. Then multiply that number by three to six months. So, if you usually spend $3,000/month on essentials, you would save $9,000 for a three-month emergency fund. You would save $18,000 for a six-month emergency fund. This is tougher -- you must save more to meet your goal -- but it gives you more money to withdraw in tough times.
Ultimately, how much to have in an emergency fund is up to you. How much do you need for your bare necessities? Use our calculator below to estimate how much you should save for a six month emergency fund.
Your ideal emergency fund:
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Fill out the inputs to see how much you should save for an emergency fund. The total will be 6 times your monthly amounts
It's best to keep your emergency fund in a separate account, so you know it's earmarked for a specific purpose.
Here are a few options:
Technically, a third option is a certificate of deposit (CD). A CD offers a fixed rate of return in exchange for locking up your money. If you withdraw money before the maturity date, you could be subject to early-withdrawal penalties, potentially canceling the benefits of opening an account.
Generally speaking, you don't want to lock up funds you might need tomorrow or next week -- consider keeping your emergency fund in savings or money market accounts instead. That way, you can withdraw money when you need it, at no penalty.
Regulation D requires banks to reserve the right to delay savings account withdrawals by seven days. This gives banks the power to fix any outstanding internal issues. But if a bank invokes this, it could make withdrawing money quickly more difficult for you.
Thankfully, this is rare. You almost always get access to your cash right away. If you'd like to be extra extra safe, keep your checking account topped up. That way, you have instant access to enough funds to get you through a seven-day delay.
Building an emergency fund is fairly straightforward. Just follow these steps:
TIP
Open a savings account, set up automatic deposits, and start saving until you reach three to six months of living expenses (or income). Contribute on your schedule -- no need to break the bank! It's okay to start slow. You can always ramp up later, should you want to.
Your car breaks down
For many, owning a car isn't optional. If your car is your only source of transportation to and from work, child care, or necessary errands (such as groceries), an unexpected problem could upend your life. If your car breaks down, feel free to use your emergency fund for repairs -- that's what your emergency fund is for.
You lose your job
If you lose your main source of income, you could face life-changing challenges. Falling behind on your mortgage could mean losing your house. Falling behind on your rent could mean getting evicted. Skipping a utility bill could mean losing power. It's a good idea to use your emergency fund to pay for daily must-haves. By keeping up with your bills, you can spend more time and energy on bouncing back quickly.
You have a large unexpected medical bill
Sometimes, insurance won't pay your bill. Unexpected surgeries, hospitalizations, or other medical costs could leave you wondering how the heck you'll afford medical care. An emergency fund is meant to take care of just this sort of thing. You may need to do more to pay the bills, but don't hesitate to withdraw from your emergency fund to reduce upfront costs.
Your home needs a vital repair
Did your heater break in the middle of winter, or did your AC break during the hottest part of the summer? Do you have a broken window? Did your basement recently flood, or did your home's foundation crack? If your home needs an important repair, use your emergency fund to take care of it. These problems become more expensive if left alone. Don't feel guilty about dipping into savings to keep your home in good shape -- it's the smart move.
Here are some of the other questions we've answered:
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A savings account is one of the best places to build and store an emergency fund. It's easy to withdraw money from most savings accounts, and you can earn a little extra income by keeping money in the account.
Yes, if you make $40,000 or less per year. In that case, you would be meeting or beating the ideal savings amount recommended by experts: three to six month's worth of income (or expenses). If you earn more than $40,000 per year, you may need to save more to maintain your current living standards during tough times.
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Please note that this calculator is not personalized financial advice and should not be considered or used as such. Nor are we promising that by use of this calculator, will you be able to save more money, preserve wealth, or otherwise.