Emergency Fund: What It Is and Why It Matters

Best kept in a savings account, an emergency fund is useful for unexpected expenses.

Margarette BurnetteDecember 9, 2020
emergency-fund-what-it-is-and-why-important
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What is an emergency fund?

An emergency fund is a bank account with money set aside to pay for large, unexpected expenses, such as:

  • Unforeseen medical expenses.

  • Home-appliance repair or replacement.

  • Major car fixes.

  • Unemployment.

Why do I 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.

"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.

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How much should I save?

The short answer: If starting small, try to set aside at least $500, but work your way up to half a year’s worth of expenses.

The long answer: The right amount for you 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. (You might need more if you freelance or work seasonally, for example, or if your job would be hard to replace.) If you do lose your job, you could use the money to pay for necessities while you find a new one, or the funds could supplement your unemployment benefits. Start small, Weston says, but start.

Having even $500 saved can get you out of many financial scrapes. Put something away now, and build your fund over time.

» Looking for top savings options? Here are our picks for the best savings accounts overall.

Where do I put my emergency fund?

A savings account with a high interest rate and easy access. Because an emergency can strike at any time, having quick access is crucial. So it shouldn’t be tied up in a long-term investment fund. But the account should be separate from the bank account you use daily, so you’re not tempted to dip into your reserves.

A high-yield savings account is a good place for your money. It is federally insured up to $250,000, so it’s safe. The money earns interest, and you can access your cash quickly when needed, whether through withdrawal or a funds transfer.

Here are some good options:

NerdWallet rating 
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APY

0.50%

With $0 minimum balance

APY

0.50%

With $0 minimum balance

APY

0.40%

With $0 minimum balance

Bonus

N/A

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N/A

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N/A

How do I build an emergency fund?

  1. Calculate the total that you want to save. Use the NerdWallet emergency savings calculator below if you need help figuring out your expenses for six months.

  2. Set a monthly savings goal. 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.

  3. Move money into your savings account automatically. If your employer offers direct deposit, there’s a good chance they can divide your paycheck between multiple checking and savings accounts so that your monthly savings goal is taken care of without touching your checking account.

  4. Keep the change. Use mobile technology to save automatically each time you make a purchase. There are savings-focused apps that link with checking or other spending accounts to round up the purchase amounts on your transactions. The extra amount is automatically transferred to  a savings account. If you usually spend cash, you can take your spare change, or maybe $1 and $5 bills after breaking a $20, and drop some in a jar at home. When the jar fills up, take it to the bank and deposit the cash.

  5. Save your tax refund. 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. 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.

  6. Assess and adjust contributions. 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 funds instead.

» Here’s what to do if you’re worried that you have too much in your emergency fund.

When saving, draw a line between emergencies and everything else. In fact, once you’ve hit a reasonable threshold of emergency savings, Weston says, it’s a good idea to begin another savings account for irregular but inevitable items, such as car maintenance, vacations and clothing. If you need help staying organized, many banks allow customers to create and label sub-accounts for different financial goals.

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.

Use this calculator to get started. It takes only a few minutes: