Emergency Fund: What It Is and Why It Matters
Best kept in a savings account, an emergency fund is useful for unexpected expenses.
At NerdWallet, we strive to help you make financial decisions with confidence. To do this, many or all of the products featured here are from our partners. However, this doesnt influence our evaluations. Our opinions are our own.
An emergency fund is a bank accountwith money set aside to cover large, unexpected expenses, such as:
» Skip aheadto see threesolid picks for bank accounts.
Having money in ahigh rate savings accountcan help you avoid borrowing. The financial buffer an emergency fund provides can keep you afloat in a time of need without having to rely on credit cards or take out high-interest loans. This is especially important if you already have these obligations.
One of the first steps in climbing out of debt, says NerdWallet columnist Liz Weston, is to give yourself a way not to go further into debt.
Up to half a year of expenses:The answer 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.
Having $500 saved can get you out of many financial scrapes. Put something away now, and build your fund over time.
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 youre not tempted to dip into your reserves.
A high-yield savings accountis a good place for your money. It is federally insured up to $250,000, so its safe. The money earns interest, and you can access your cash quickly when needed, whether through withdrawal or funds transfer.
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.
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 dont carry cash, you could try a mobile savings app that makes automatic transfers, with rules that are based on the transactions you make. Read more about ourrecommendations for savings apps: Qapital, Acorns and Digit.
If theres money left at the end of a pay period, move some into your emergency fund.
See which parts of your monthly spending you can trim, so youll have cash left over to build your fund. Some ways to save include carpooling, cooking more meals at home, saving leftovers and avoiding small daily purchases such as takeout coffee.
If you have the time and willpower, get a second job or sell unused items from home to accumulate more money for your fund. (See19 Ways to Find Fast Cash, More Savings.)
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 to 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.
Check in after a few months to see how much youre 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.
Click below to find savings accounts in your area with the best interest rates and reasonable minimum balance requirements. And here are our picks for thebest savings accountsoverall.
Whats an emergency? Something that affects your health or ability to earn money.
Holidays, birthdays and mental pick-me-ups for yourself or significant others
The chance to get a great deal on something you dont need
Expenses that arent surprises, such as car insurance
When saving, draw a line between emergencies and everything else.In fact, once youve hit a reasonable threshold of emergency savings, Weston says, its a good idea to begin another account for irregular but inevitable items such as car maintenance, vacations and clothing.
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.
Spencer is an expert on certificates of deposit at NerdWallet. His work has been featured by USA Today and the Los Angeles Times.Read more
We want to hear from you and encourage a lively discussion among our users. Please help us keep our site clean and safe by following ourposting guidelines, and avoid disclosing personal or sensitive information such as bank account or phone numbers. Any comments posted under NerdWallets official account are not reviewed or endorsed by representatives of financial institutions affiliated with the reviewed products, unless explicitly stated otherwise.
California: California Finance Lender loans arranged pursuant to Department of Business Oversight Finance Lenders License 60DBO-74812.
Disclaimer:NerdWallet strives to keep its information accurate and up to date. This information may be different than what you see when you visit a financial institution, service provider or specific products site. All financial products, shopping products and services are presented without warranty. When evaluating offers, please review the financial institutions Terms and Conditions. Pre-qualified offers are not binding. If you find discrepancies with your credit score or information from your credit report, please contact TransUnion® directly.