How many times has this happened: You’ve finally nailed your budget — from rent to groceries to “fun money” — but then that stubborn check-engine light comes on. Next thing you know, you’re out a thousand bucks over a repair you didn’t see coming.
Then it hits you. There really should be a special “Murphy’s Law” line item in your budget.
But that’s where an emergency fund comes in. What is an emergency fund? It’s that cushion of savings you keep around just in case you get hit with an unexpected expense that can throw your budget out of whack. But how should you use it — and how much should you put away? Here’s how to get started.
What is an emergency fund?
What should I use my emergency fund to pay for?
Here’s what an emergency is not: a vacation to Hawaii, a flash sale on your favorite brands, a birthday gift for your best friend. Those should either fit into your budget already or be goals that you’re saving for separately; don’t dip into an emergency savings account to pay for them.
So, what warrants a withdrawal? Here are a few examples: Covering your rent after losing your job. Paying the dentist bill after your seemingly harmless toothache turned into an expensive root canal. Fixing your roof when a storm sends a tree crashing through it. Buying a last-minute plane ticket to attend a loved one’s funeral. In other words, out-of-the-blue expenses that are hard to avoid.
How much do I need to save in an emergency fund?
How much you should keep in your emergency fund depends a lot on your situation, but if you don’t have one at all, start by saving at least one month of your expenses. In fact, we recommend prioritizing that one-month savings before you focus on any other financial goals, like aggressively beefing up your retirement account or adding to your dream home fund. That’s because emergency situations tend to be big-ticket items, and without a fund to pay for them, you may have to break out your credit card (and pay interest, meaning the expense will cost you even more in the long run).
Once you’ve reached the one-month mark, you can start spreading the love to your other goals. But you should still keep putting money toward your emergency fund simultaneously, even if it’s just $50 or $100 a month, until you have about six months’ worth of expenses stashed away.
While six months’ of expenses is a good general rule, there are cases when you may not need as much — or when you may need more. For instance, if you live by yourself, don’t have much debt and have other goals well funded, you may need less than six months’ worth of expenses. On the flipside, if you’re a sole breadwinner for your family and have unpredictable income, you may want to have more than six months’ saved up.
Where should I keep my emergency fund?
If an emergency hits, you’ll need fast access to your cash, so you don’t want these funds tied up somewhere that may be difficult to access at a moment’s notice. But it’s not a good idea to have them in your checking account either, because your emergency money should not be mixed in with your everyday money.
Opt for a savings account instead — and one that’s separate from savings accounts you have going for other goals. (You wouldn’t want your vacation fund depleted because of every flat tire or emergency-room visit.)
And for a little extra boost, consider keeping your emergency fund in a high-yield savings account, so that you’re making some interest off your money and it can grow a little faster.
Here’s another pro tip: Figure out how much you can comfortably funnel into your emergency fund each month, and then automate a recurring transfer from your checking account to your emergency savings account. Chances are you won’t even miss the extra cash — and your future self will thank you the next time a crisis strikes.