Your car breaks, you start having health issues, that job turns into that former job: Nobody’s road is bump-free. Those bumps usually cost money, and they can really throw you off track. According to the Fed’s most recent survey, 40% of Americans would struggle to pay for an unexpected $400 expense without selling something or borrowing money. So whether you think of it as an emergency fund, a rainy day account, a financial cushion, or an “uncertainty fund,” you need one.
But exactly how much do you need to save into an emergency fund, and what do you do with that money? Here’s what you need to know.
How much to save in your emergency fund
At Ellevest, we typically recommend that you set aside three to six months’ worth of your take-home pay for emergencies. That can feel like a really big number, especially if you’re starting from scratch ... but it’s one of the most important things you can do with your money. Because imagine if you needed it and didn’t have it. (Ouch.)
We can almost hear you thinking it: Three to six months is kind of a range. How much do I really need? There are two things that come into play during that decision: how much uncertainty you might have to face and your personal comfort level.
The more uncertainty you’ve got in your financial life, the bigger you’re going to want your emergency fund to be. For example, if you freelance full-time as a single mom and own a fixer-upper, you’re probably going to want closer to six months’ (or more) of your salary saved up. (Also, you are a superhero and we bow down to your amazingness.) Or if you’ve been in a steady, salaried job for a while, share finances with someone (like a spouse), and have no dependents and no mortgage, three months is probably good for you. (Heck yeah. You’re killing it.)
But maybe you’re in a stable, salaried job and share finances with someone in a stable, salaried job — and yet, three months doesn’t feel like enough security for you. In that case, save more. These are just guidelines, so do what feels best for you. (Just don’t keep all your money in cash. That can really cost you — here’s why.)
Once you’re clear on your number, three things to help you get started saving up. First: Pay down high-interest-rate debt — anything more than 5% — before you get started. (Waiting to pay that debt off can really cost you.) Second: Find a high-level budgeting guideline that’s flexible enough to work for your life. The 50/30/20 rule is our favorite at Ellevest. Third: Work your way up, and set mini-goals along the way. Maybe your first goal is $1,000, and then one month’s expenses, and then two, and then three.
Where to keep your emergency fund
This one’s a biggie: Keep your emergency fund in cash. OK, not literally cash under the mattress, but in a bank account. One that’s insured by the FDIC, meaning that your money’s guaranteed by the government if something were to happen to that bank.
Ellevest’s Emergency Fund goal is held in FDIC cash, so that might be a good place. High-yield savings accounts are another option. We don’t recommend putting your emergency fund in a certificate of deposit (CD) or any other type of account that doesn’t let you make withdrawals whenever you want. Don’t risk it.
How to decide whether to use your emergency fund
Definitely an emergency: Anything unexpected that you absolutely must pay for. Your water heater breaks. You have to travel to see a sick loved one.
Definitely not an emergency: Things you want but don’t really need, or things that you could save up for. Think last-minute vacation plans or your annual insurance premiums.
But there’s also a gray area, and that’s different for everyone — here’s our best advice to help you decide what is and isn’t an emergency for you.
Saving up three to six months’ take-home pay, in cash, for emergencies only, is one of the earliest steps you can make if you want to take control of your financial future. (Wondering about the others? We’ve got you. Here are smart money moves to make at every age.)
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