What is an Emergency Fund?
An emergency fund is a separate saving or bank account used to cover or offset the expense of an unforeseen situation, such as:
- Unforeseen medical expenses.
- Home-appliance repair or replacement.
- Major car fixes.
- Unemployment.
An Emergency Fund is NOT
- For planned purchases like a house, new car, college education and such.
- A large, unattainable amount – start with setting aside at least 10% of your net income.
- A set amount for everyone – they vary according to your income, lifestyle and necessary household and family expenses.
How much should you save?
Your emergency fund should cover at least 3 to 6 months’ worth of expenses. To determine this amount, add up how much you spend in a single month on things that you can’t go without (e.g. food), and the contributions you owe each month (e.g. monthly savings or a mortgage).
Where can you park your emergency fund?
"One of the first steps in climbing out of debt is to give yourself a way not to go further into debt," says NerdWallet columnist Liz Weston.
Why do you need an emergency fund?
Emergency funds create a financial buffer that can keep you afloat in a time of need without having to rely on credit cards or high-interest loans. It can be especially important to have an emergency fund if you have debt because it can help you avoid borrowing more.
How do you build an emergency fund?
How do build an emergency fund?
Use the emergency savings calculator below
if you need help figuring out your expenses for six months.
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.
If your employer offers direct deposit, there’s a good chance they can divide your salary between multiple checking and savings accounts so that your monthly savings goal is taken care of without touching your checking account.
You get a shot at this once a year — and only if you expect a refund. Saving it can be an easy way to boost your emergency stash.
When you file your taxes, consider having your refund deposited directly into your emergency account.
When you file your taxes, consider having your refund deposited directly into your emergency account.
Check in after a few months to see how much you’re saving, and adjust if needed, especially if you recently withdrew money from your emergency fund.
On the other hand, if you’ve saved up enough to cover six months of expenses and have extra cash, you might consider investing the additional fundsinstead.
On the other hand, if you’ve saved up enough to cover six months of expenses and have extra cash, you might consider investing the additional fundsinstead.
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