Emergency Fund Essentials: What it Is and Why You Need One

Key Takeaways

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Emergency Fund

Savings that you set aside for unexpected expenses
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3-6 Months

A general rule of thumb for deciding exactly how much money you want to set aside for you emergency fund is 3-6 months worth of your current cost of living
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3 in 10

Americans have no emergency savings

An emergency fund is exactly what it sounds like. It’s savings that you set aside for, well, emergencies. This could include any unexpected expenses thing from car troubles, medical bills, a home or appliance repair, or even a cell phone or laptop damage. Emergency funds can also support you financially if you ever lose your job without warning and need some time before you can find a new one. Planning ahead and putting money aside for these types of situations ensures that you’ll be able to remain financially secure with as little debt as possible, while also staying on track for your other saving or financial goals. It’s much better to have money set aside for all those “what if” scenarios than to have to take out a high-interest loans or put it all on credit that will inevitably snowball into more debt. According to NerdWallet writer Liz Weston, “one of the first steps in climbing out of debt is to give yourself a way not to go further into debt.”

Image courtesy of Bungalow

There are real benefits of having an emergency fund. This financial buffer acts as a safety net and gives you something to fall back on in case of emergencies, leading to lower levels of stress not just about money but also in actual instances of emergencies. Another benefit is that it discourages spending on a whim. Instead of keeping extra cash in a checking account that can be easily spent because it's just sitting there, keeping it in designated savings account will help you stick to your savings goals.

A general rule of thumb for deciding exactly how much money you want to set aside for you emergency fund is three to six months worth of your current cost of living. This should include all expenses from rent, utilities, food, insurance or car payments, food, and even subscription services. If this feels like too large a goal to start out with, start small with an amount you find manageable, like $500-$1,000. One easy way to add to your emergency fund every year is to consider your tax returns as part of your emergency fund padding. Instead of spending it on that cool pair of shoes you just saw on an Instagram ad, save it for when you actually need it. We’ve found that it helps to sit down and decide how much of each pay check you can contribute to your emergency fund. This way, you have a set amount each month and you’ll have a concrete timeline of savings. If this feels like too much work, try our app Mooch which does this for you automatically, and even pays you bonuses each month for sticking to your savings goals.

Image courtesy of Principal

Wondering what the best account is for taking good care of your savings? Make sure you choose an account that is first and foremost easily accessible. You want to choose a savings account that would allow you instant access to your funds and the ability to withdraw them right away, if needed. This means NOT using a long-term investment fund. Chances are that if it really is an emergency, it will be really important to have fast access. We do however, recommend separating the account from your bank account so you aren’t tempted to dip in to your savings for any reason. The most bang for your buck with regards to savings account is going to be a high-yield savings account. This means that your savings will actually earn interest as it sits, and is also federally insured so its safety is guaranteed. We love this guide by NerdWallet of the eight best savings accounts as of February 2022.

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