- An emergency fund can help you weather financial crises and unexpected expenses
- Financial advisors recommend saving at least three months’ worth of expenses
- Multiple savings vehicles can make sense for an emergency fund
Everyone faces unexpected expenses or financial emergencies at some point in their lifetime, from a medical event to a car repair to a sudden change in housing. The key to weathering these financial predicaments without taking on debt is an emergency fund.
An emergency fund, or contingency fund, is money set aside for unexpected financial emergencies or expenses. This cash reserve can help cover medical bills, home repairs, a loss in income or other urgent financial needs.
How much should you have in an emergency fund? At minimum, most financial advisors recommend saving at least three months’ worth of living expenses. However, with 51% of Americans reporting that they have less than that in their savings, the most crucial step is simply to start an emergency fund — and then helping it grow.
Read on for more information about why an emergency fund is so important and how you can set one up.
The importance of an emergency fund
Think of your emergency fund as a financial safety net. Having money set aside in an emergency fund gives you access to a cash reserve when you need it most. That access is vitally important — without an emergency fund, your financial wellness could be at risk.
Unexpected expenses may force you to take on debt or miss payments, creating additional financial stress in the process. It’s important to note that an emergency fund differs from a rainy day fund, which is money often used for splurges. On the other hand, emergency funds are reserved for emergencies and designed to keep you out of a financial crisis.
Emergency fund uses
Hopefully, you can avoid unexpected expenses. But if you encounter a sudden financial need, your emergency fund can help. Here are some things that you might use an emergency fund for:
- Home repairs: A flooded bathroom or broken window may not have been in your budget. But an emergency fund can help you tackle surprise home repairs without having to take on new debt.
- Job loss: You can lean on an emergency fund to help pay for your living expenses if you suddenly lose your income. Tap into your cash reserve to pay for rent, utilities and food, while you job hunt.
- Car repairs: The cost of car repairs can come as a shock, especially if you weren’t planning on them. Use an emergency fund to take the edge off of unexpected car issues.
- Medical bills: Fifty percent of Americans have medical debt from hospital stays, diagnostic tests and emergency room visits. A cash reserve can keep medical debt at bay.
- Pet emergencies: A sudden illness or injury can send your beloved pet to the vet and incur hundreds or thousands of dollars in bills. A contingency fund gives you the means to handle pet emergencies and keep your furry friend healthy.
These are just some of the unexpected events that would merit tapping into an emergency fund. Several other instances can also catch your finances by surprise and make you grateful for an emergency fund.
How to set up an emergency fund
When it comes to setting up an emergency fund, it’s always better to start sooner than later. Once you’ve started saving, you can build your fund and lower any stress or anxiety about a potential financial emergency. Here’s how to get started:
- Determine where to keep an emergency fund
- Create a goal emergency fund amount
- Start and continue to build your emergency fund
Decide where to keep an emergency fund
There are many different savings accounts to consider for an emergency fund, each offering various benefits. Broadly speaking, you’ll want a savings vehicle that provides easy access to your funds, along with the assurance that you won’t lose them.
