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Emergency Fund: What It Is and Why It Matters

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Emergency Fund What is it and Why It’s Important

The best place to keep it is a savings account An emergency fund can be helpful for emergencies.

By Margarette Burnette, Senior Writer Savings accounts and money market accounts bank accounts Margarette Burnette is an specialist in saving and has written about bank accounts from before the Great Recession. Her writing has been featured in major newspapers. Before joining NerdWallet, Margarette was a freelance journalist, with bylines appearing in magazines like Good Housekeeping, and Parenting. Margarette is located in Atlanta, Georgia.

Dec 21, 2021

Read by Kathleen Burns Kingsbury Wealth psychology expert and coach Kathleen Burns Kingsbury, founder of KBK Wealth Connection and host of the Breaking Money Silence podcast, is a widely published writer and speaker. As an expert on finance psychology Kathleen is a regular on the television, and her writing has been featured in The New York Times, The Wall Street Journal, “PBS NewsHour,” Money magazine, Today Money, Forbes and CNBC. Kathleen worked as an adjunct faculty instructor at the McCallum Graduate School at Bentley University from 2009 to 2019 and currently teaches in the college of Champlain College.

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What is an emergency fund?

The emergency fund can be described as a bank account that has money set aside to pay for major, unexpected expenses like:

Unforeseen medical expenses.

Home-appliance repair or replacement.

Major car repairs.

Unemployment.

Compare top savings accounts

Find a savings account that is high yielding with a great rate. Compare rates by comparison.

What is the reason I should have an emergency fund?

The emergency fund is an emergency fund that will keep you going in emergency without the need to depend for credit or loans. It is especially crucial to have an emergency fund if you’re in debt as it could help you avoid borrowing more.

“One of the first steps to climb out of debt is to provide yourself a chance to not be further in the debt cycle,” says NerdWallet columnist Liz Weston.

How much should I put aside?

The short answer: If starting out small, save at least $500, and gradually increase it to a half-year’s cost of living expenses.

The long answer is: The best amount for you depends on your financial situation, but a good rule of thumb is to have enough to cover 3 to 6 months’ worth for living expenses. (You might need more money if you are a freelancer or working seasonally for instance, or if your job would be hard to find a replacement for.) If you lose the job you have, then you could use the money to pay for necessities while you search for a replacement, or the funds could be used to supplement your unemployment benefits. Start by making small steps, Weston says, but begin.

A savings of even $500 can get you out of many financial scrapes. Start saving now, and build your money over time.

Looking for the top savings options? Here are our recommendations for the .

Where do I put my emergency money?

A savings account that has an excellent rate of interest and quick access. Since emergencies could strike at any moment, having quick access is vital. It shouldn’t be locked to a long-term investment fund. The account should however be distinct from the account at your bank that you use daily, so you don’t have the temptation to draw funds from your account.

A is a safe place for your money. It is federally insured to $250,000 for each depositor, which means it’s protected. The money earns interest, and you can access your cash quickly when needed either through withdrawal or a funds transfer.

Credit Card for Savings and Cash Management. Money Market

Member FDIC

SoFi Savings and Checking

APY 3.75 percent SoFi members who have direct deposit can earn up to 3.75% annually-percentage yield (APY) on savings balances (including Vaults) and 2.50% APY on check balances. No minimum amount for direct deposits that is required to be eligible for 3.75% APY for savings, and 2.50% APY for checking balances. Customers who do not deposit direct deposits will receive 1.20 percent interest on balances of savings and checking (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 01/04/2023. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet

Min. balance for APY $0

Member FDIC

Marcus by Goldman Sachs Online Savings Account

APR 3.50 35% 3.50% Annual percentage yield (annual per cent yield) with a minimum balance of $0 to earn stated APY. Accounts must be in a positive balance to remain open. APY is valid until 02/07/2023.

Min. balance to APY $0

They combine the features and services that are similar to savings, checking or investment accounts into one account. The cash management account is typically offered by non-bank financial institutions.

They combine the services and features similar to savings, checking and/or investment accounts into one product. These accounts for managing cash are typically offered by non-bank financial establishments.

on the website of Wealthfront.

Wealthfront Cash Account

APY 4.05%

Min. balance to APY $1

on the Betterment website.

Betterment Cash Reserve – Paid non-client promotion

APY 4.00 percent Annual percentage yield (variable) is at 02/06/2023.

Min. balance for APY $0

CDs (certificates of deposit) are a type of savings account with an interest rate fixed and a term typically, they have higher rates of interest than traditional savings accounts.

CDs (certificates of deposit) are a type of savings account that comes with a fixed rate and term generally, and have higher rates of interest than regular savings accounts.

CIT Bank CD

APY 4.60 percent

Term 1.5 years

Member FDIC

Marcus By Goldman Sachs High-Yield CD

APY 4.40% 4.40% The APY (annual percentage yield) as of 01/25/2023.

Term 1 year

Checking accounts are utilized to deposit cash on a daily basis and for withdrawals.

Checking accounts are used to make daily cash deposits as well as withdrawals.

Member FDIC

SoFi Savings and Checking

APY 2.50% SoFi members with direct deposit can receive up 3.75 percent annually-percentage yield (APY) on savings balances (including Vaults) and 2.50% APY on checking balances. No minimum amount of direct deposit needed to qualify for 3.75% APY for savings and 2.50% APY for checking balances. Customers who do not deposit direct deposits will get 1.20% APR on all balances, including savings and checking (including vaults). Interest rates are variable and subject to change at any time. The rates shown are current as of 01/04/2023. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet

Monthly fee: $0

Upgrade Rewards Checking

APR N/A

Monthly fee $0

They are FDIC Insured

Current Account

A/P N/A

Monthly fee $0

They are FDIC Insured

Chime Checking Account

APJ N/A

Monthly fee $0

Member FDIC

Axos Bank(r) Rewards Checking

APY 1.25% Receive monthly direct deposits of $1500 or more to earn 0.40% APR. Use the Axos Visa(r) Debit Card for a total of 10 transactions each calendar month (min 3 cents per transaction) or enroll for Account Aggregation/Personal Finance Management (PFM) within Online Banking to earn 0.30 percent APR. Keep an average daily balance of $2,500 on An Axos managed Portfolios Investment Account for 0.20% APR. Maintain an average daily balance of $2,500 per month within An Axos self-directed trading Invest Account to earn 0.20 percent APR. Utilize your Rewards Checking account for the full each month Axos Consumer loan payment to earn 0.15 percent APY.

Monthly fee of $0

The money market accounts have rates similar to savings accounts. They also have some checking features.

Money market accounts pay rates that are similar to savings accounts. They also have some checking features.

Member FDIC

UFB Best Money Market

APY 4.21 percent

Min. balance required for APY $0

Member FDIC

Discover Bank Money Market Account

APY 3.20 percent

Min. balance to APY $1

How do I build an emergency savings account?

Determine the amount you would like to save. Use the below if you need help figuring out your expenses for six months.

Make a goal for your savings each month. This will allow you to get to save regularly and will make the task easier. One method to accomplish this is to automatically transfer funds to your savings account each when you are paid.

You can transfer money to your savings account on a regular basis. If your employer allows direct deposit, there’s a great chance they can divide your paycheck between multiple savings and checking accounts to ensure that your savings goal for the month is taken care of without having to touch your checking account.

Save the change. Use smartphones to make savings every time you make a purchase. It is possible to link checking accounts and other accounts to round up the amount of your purchases. The excess amount is then transferred to the savings account.

Make sure you save your tax refund. It is possible to get this once a year – only if you expect to receive a tax refund. Saving it can be an easy method to increase the emergency funds. If you have to file your taxes, you may want to have your refund directly deposited into your emergency account. Alternately, you could think about making adjustments to your tax deductions to have less amount of money that is that is withheld. If altering your deductions are the best option for you, then you could put the extra money into your emergency savings account.

Assess and adjust contributions and adjust. Check in after a few months to assess how much you’re saving and adjust if needed especially if you’ve recently took money out of your emergency savings. However, if you’ve saved up enough to pay for six months of expenses , and have cash left over it might be worth making investments with the extra funds instead.

Here’s what you should do if you think you may have

When you’re saving money you should draw a line between emergencies and other. When you’ve reached a threshold of emergency savings, Weston says, it’s best to create a savings account for more irregular but essential items such as car maintenance holidays, clothing, and vacations. If you need help staying organized, many banks allow customers to create and label sub-accounts for various financial goals.

Every person should save money for the unexpected. Having something in reserve can make the difference between surviving the whims of a financial storm for a few days or slipping into deep debt.

Use this calculator to begin. It takes only just a few minutes

From top to bottom

Author bios: Margarette Burnette is a savings account specialist at NerdWallet. She has had her work featured in USA Today and The Associated Press.

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