Life is unpredictable. You never know when you’ll experience job loss, an illness, or a sudden expense. While you can’t always anticipate when something will happen, you can prepare for it. This is where an emergency fund comes in.
What is an emergency fund?
An emergency fund is a pool of money set aside to help pay for an unexpected situation. It’s a fund of money you can fall back on when you need it instead of relying on your credit card and potentially getting into debt.
For instance, your car might break down on your way to work tomorrow. If you require a tow truck and $800 worth of repairs, how will you pay for it?
Other expenses that an emergency fund can cover include:
- Loss of income
- Medical expenses
- Home repairs
In these situations, an emergency fund can allow you to handle unplanned bills and expenses without affecting your monthly budget.
Dealing with an emergency can also take up a lot of your time and be emotionally draining. Having money on hand can help you avoid additional financial stress and deal with the problem head-on. You can then take steps to move forward.
How much should I have in my emergency fund?
The answer here depends on you and your lifestyle. To help you decide your emergency fund amount, take these questions into account:
- Do you have debt?
- Do you have kids?
- Do you live in an area with a high cost of living?
- How much money do you need to pay monthly bills and basic expenses?
- Do you have a car?
- Do you have pets?
A single person living in a low-cost-of-living area may have a smaller amount of emergency savings than someone with a large family and lives in an expensive city like New York or San Francisco.
How many months should you have in your emergency fund?
There is no one correct answer to this question – you should consider your personal circumstances.
Some financial experts suggest having $1,000 in an emergency starter fund and then working towards three to six months’ worth of expenses.1 Other experts recommend an emergency fund that will cover up to 12 months’ worth of living expenses, though this may be a tough goal given your situation.2
Again, it all boils down to your lifestyle, risk tolerance, and what you can realistically save.
Where to keep an emergency fund
A savings account is a great place to keep your emergency savings for several reasons, including:
- Safety: Storing your money under your mattress isn’t safe. Ideally, you want to keep your money in a savings account that is federally insured through the Federal Deposit Insurance Corporation (FDIC).
- Accessibility: It’s also important that your emergency money is liquid so that it’s readily available if and when you need it. Linking your savings account to your checking account makes it easy to access your emergency savings.
- Earnings: If you aim to build your emergency savings to cover six or more months of expenses, this can equal a large sum of money. You can grow your money with interest by storing your emergency fund in a savings account.
Pro tip: Look for a high-yield savings account to grow your money even faster.
How to start an emergency fund
Just follow these steps to start setting up your emergency fund:
- Open a savings account. You can open a separate savings account specifically to house your emergency fund.
- Decide how much you want to save. Think about how much you should save each month to put toward your emergency savings. You can always start small with $10 to $20 per week. The key is to start somewhere and save consistently. Even having $100 saved up for an emergency is better than nothing.
- Sign up for automatic savings. To make saving as simple as possible, you can sign-up for automatic savings features so money is immediately transferred from your checking account to your savings every payday.
- Practice self-discipline. Commit to not touching this stash of money unless it’s an emergency, something you need to pay right now. For example, if you’re short on rent money because of a job loss, that is an emergency. But, if you want to go to a friend’s out-of-state wedding, that wouldn’t qualify.
- Keep saving. If you have to tap into your savings to cover an emergency, that’s okay. That’s what the money is there for. But make sure you continue to replenish your emergency savings to ensure you can handle the next unexpected expense.
Why should you have an emergency fund?
Having an emergency fund is an essential part of your financial wellness. When you focus on your financial health, you can avoid extra stress when life inevitably happens.
Learn how much you should have in your emergency fund to cover a car repair.
FAQs
Is $20,000 a good emergency fund?
What is considered a “good” emergency fund can vary significantly between people. For example, a single person living in a low-cost-of-living area can get away with a smaller amount of emergency savings than someone who has kids and pets and lives in an expensive area.
Is $10,000 good for an emergency fund?
Experts typically recommend saving three to six months of expenses in an emergency fund. To determine if $10,000 in emergency savings is good enough for you, calculate if it will cover your living expenses for at least three months.
Is a $5,000 emergency fund enough?
There is no one-size-fits-all answer regarding how much you need in your emergency fund. What is considered “enough” depends on various factors, like where you live, your family size, and your existing debt. If $5,000 covers at least three months of your living expenses, a $5,000 emergency fund may be good enough for you.
How much should I keep in an emergency fund?
The amount you need to save depends on your lifestyle and what you can realistically save. Some experts recommend saving three to six months’ worth of expenses.