An emergency fund is money set aside in a bank account to pay for big, unexpected costs like:
- Unforeseen medical expenses.
- Repair or replacement of home appliances.
- Major car fixes.
- Unemployment.
Why do I need a fund for bad times?
Emergency funds give you a financial cushion that can help you stay afloat when you need it most, without having to use credit cards or loans with high interest rates. Having an emergency fund can be especially important if you already have debt, because it can help you avoid borrowing more money.
Liz Weston, a columnist for NerdWallet, says that one of the first steps to getting out of debt is to give yourself a way to not go deeper into debt.
How much do I need to put away?
If you want to start small, try to save at least $500, but work up to a half-worth year's of expenses.
The long answer is that the right amount for you depends on your finances, but a good rule of thumb is to have enough to cover your living costs for three to six months. (You might need more if you work on your own or only during certain times of the year, or if your job is hard to replace.) If you lose your job, you could use the money to pay for things you need while you look for a new job, or you could use it to add to your unemployment benefits. Weston says to start small, but to start.
Even if you only save $500, it can help you get out of many financial jams. Start saving now, and your fund will grow over time.
Where do I put my money for emergencies?
A savings account that is easy to use and pays a lot of interest. Since an emergency can happen at any time, it's important to be able to get there quickly. So it shouldn't be put in a fund that invests for the long term. But you should keep this account separate from the one you use every day so you won't be tempted to use your savings.
A savings account with a high interest rate is a good place for your money. It is safe because the government backs it up to $250,000 per depositor. The money earns interest, and you can get to it quickly if you need to, either by taking it out or sending it to another account.
How do I save money for emergencies?
Figure out how much you want to save. If you need help figuring out how much you need to save for an emergency, use the calculator below from NerdWallet.
Set a goal to save money each month. This will help you save money on a regular basis and make the task less scary. One way to do this is to have your paycheck automatically put money into your savings account.
Move money automatically into your savings account. If your employer offers direct deposit, they may be able to split your paycheck between multiple checking and savings accounts so that your monthly savings goal is met without touching your checking account.
Don't give it back. Use your phone to automatically save money every time you buy something. There are apps that help you save money that connect to your checking account or other accounts you use to buy things and round up the amounts you spend. The extra money is put into a savings account on its own.
Keep your tax money. You can try this once a year, and only if you want your money back. It can be a simple way to add to your emergency fund. When you file your taxes, you might want to have your tax refund sent straight to your emergency savings account. You could also change your W-4 form so that less money is taken out of your pay. If changing your deductions is a good idea, you can put the extra money into an emergency fund.
Look at the contributions and make changes. Check back in a few months to see how much you've saved and make changes if necessary, especially if you just took money out of your emergency fund. On the other hand, if you've saved enough money to cover your costs for six months and still have money left over, you might want to invest it instead.
Set aside money for emergencies and for everything else. Weston says that once you've saved enough for emergencies, it's a good idea to start another savings account for things like car repairs, vacations, and clothes that you don't have to spend money on every month. Many banks let customers set up and name sub-accounts for different financial goals, which can help you stay organized.
Everyone needs to save for things that might go wrong. Having something saved up can make the difference between being able to weather a short-term financial storm and getting into a lot of debt.
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