Guide to Emergency Funds
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What Is an Emergency Fund?
Why is Having an Emergency Fund Important?
It can keep you out of debt. A backup stash of cash allows you to handle any unexpected bills without having to rely on credit cards or high-interest loans. This can be especially important if you already have debt, because it can help you avoid borrowing more and getting deeper in the hole. It reduces financial stress. Knowing you have a financial buffer can relieve a lot of worry. Even if the “check engine” light turns out to be a real — and real expensive — problem, you know you can cover it and still buy food and pay the rent. It keeps you from spending everything you earn. When you set up an emergency savings fund (more on how to do that below), a small amount of your earnings will get whisked aside before you can spend it on something else — or even miss it.
How Does an Emergency Fund Work?
Emergency Fund Uses
Car repairs (bodywork, new transmission, new tires) Health expenses (hospital visit, deductible, medicine) Technology (replace your broken computer, laptop, phone) Job loss (to cover expenses until you work again) Home repair (broken hot water heater, roof repair) Essential travel Pet care Big clothing sale Last-minute trip to the beach Massages or haircuts
Average Amount to Save in an Emergency Fund
Mortgage or rent Car payment Gas/transportation costs Insurance payments Groceries Utilities (internet, electricity, gas, phone) Childcare
Common Places to Put Your Emergency Fund Savings
A high-yield savings account These accounts are typically available at online banks and offer the same features and protections as traditional savings accounts. The difference is that they generally offer a significantly higher annual percentage yield (APY) than the average interest on a savings account. A money market account A money market account offers the features of a regular savings account along with some of the conveniences of a checking account, such as checks and a debit card. APYs are generally higher than a standard savings account, but you typically need to maintain a higher monthly minimum balance (which could be an advantage for an emergency fund). You can find money market accounts at credit unions and traditional and online banks.
Building an Emergency Fund
Set a Savings Goal
Automate Your Savings
Take Advantages of Windfalls
Use Apps to Your Advantage
Frequently Asked Questions
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