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Emergency Fund The Emergency Fund: What Is It and Why It’s Important

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Emergency Fund What is it and Why It’s Important

Best kept in the savings account, an emergency fund is beneficial for unexpected expenses.

By Margarette Burnette Senior Writer Savings accounts, money market accounts, banks Margarette Burnette is a savings expert who has been writing about bank accounts since prior to when the Great Recession. Her work has been featured in , and other major newspapers. Before joining NerdWallet, Margarette was a freelance journalist who had bylines in magazines like Good Housekeeping, and Parenting. Margarette is located in Atlanta, Georgia.

Dec 21, 2021

Reviewed 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 known writer and speaker. As an expert in finance psychology Kathleen is a regular on the television, and her writing has been highlighted 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 McCallum Graduate School from 2009 to 2019. McCallum Graduate School at Bentley University from 2009 until the year 2019 and currently teaches at Champlain College.

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What exactly is an emergency fund?

The emergency fund can be described as a savings account that is put aside to cover the unexpected costs of a large scale, like:

Unforeseen medical costs.

Repair or replacement for your home appliance.

Major car fixes.

Unemployment.

Compare top savings accounts

Find a high-yield savings account with a good rate. Compare rates side-by-side.

Why do I need an emergency fund?

The emergency fund is a financial buffer that can keep you afloat in a time of need without the need to depend upon credit card or higher-interest loans. It can be especially important to have an emergency fund in case you have debt, because it can aid in avoiding borrowing more.

“One of the first steps towards climbing over debt would be to provide yourself a chance to not get further in debt,” says NerdWallet columnist Liz Weston.

How much should I save?

The quick answer is: If you’re beginning small, put aside at minimum $500, then gradually increase it to half a year’s cost of living expenses.

The answer is long and complicated is: The best amount for you depends on your financial situation However, a good rule of thumb is to have enough to cover 3 to 6 months of living expenses. (You may require more money if you are a freelancer or working seasonally for instance or if you lose your job is difficult to find a replacement for.) If you are forced to quit the job you have, then you could make use of the funds to purchase necessities until you search for a replacement or help you to pay for unemployment benefits. Start by making small steps, Weston says, but begin.

Even a small amount of savings could help you avoid many financial scrapes. Start saving now, and build your fund over time.

>> Looking for top savings options? These are our top choices for the .

Where do I put my emergency money?

A savings account that has a high interest rate and easy access. Since emergencies can strike at any time and access to it quickly is essential. So it shouldn’t be tied in a long-term investing fund. The account should however be distinct from the bank account that you are using every day, so that you’re not tempted to draw funds from your account.

A is a good spot to keep your money. It is insured by the federal government up to $250,000 per depositor therefore it’s secure. The money earns you interest and you’ll be able to access cash fast when you need it either through withdrawal or transfer.

Credit Card for Savings and Cash Management. Money Market

Member FDIC

SoFi Checking and Savings

APY 3.75 percent SoFi members who have direct deposit earn up to 3.75 percent annual percentage yield (APY) on savings balances (including Vaults) and 2.50 percent APY on their checking balances. There is no minimum amount for direct deposits that is required to be eligible for 3.75% APY for savings, or the 2.50% APY on checking balances. Direct deposit members will get 1.20 percent APR on all balances of savings and checking (including vaults). Interest rates are variable and may change at any point. The rates listed are current as of 01/04/2023. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet

Min. balance required for APY $0

Member FDIC

Marcus by Goldman Sachs Online Savings Account

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

Min. balance required for APY $0

These cash accounts combine features and services that are that are similar to savings, checking and/or investment accounts in one account. The cash management account is usually provided by non-bank financial institutions.

The cash accounts offer features and services similar to checking, savings and/or investment accounts in one account. Cash management accounts are usually offered by non-bank financial institutions.

on the website of Wealthfront.

Wealthfront Cash Account

APY 4.05 percent

Min. balance to APY $1

on the Betterment website.

Betterment Cash Reserve – Paid non-client promotion

APY 4.00 Percentage of annual percent yield (variable) is as of 02/06/2023.

Min. balance to APY $0

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

CDs (certificates of deposit) are a form of savings account that comes with the option of a fixed rate and time generally, and have higher interest rates than standard savings accounts.

CIT Bank CD

APY 4.60%

Time 1.5 years

Member FDIC

Marcus is a product of Goldman Sachs High-Yield CD

APR 4.40% 4.40% The APY (annual per cent yield) as of 01/25/2023.

One year of term

Checking accounts can be used for cash deposits on a regular basis as well as withdrawals.

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

Member FDIC

SoFi Savings and Checking

APY 2.50 SoFi members who have direct deposit can earn up to 3.75 percent annual percentage yield (APY) on savings balances (including Vaults) and 2.50 percent APY on their checking balances. The minimum direct deposit amount that is required to be eligible for 3.75% APY for savings and 2.50% APY on checking balances. Members without direct deposit will earn 1.20% APY on all account balances, including savings and checking (including Vaults). Interest rates are variable and can change at any time. These rates were last updated on 01/04/2023. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet

Monthly fee: $0

Upgrade Rewards Checking

APY N/A

Monthly fee: $0

The deposits are FDIC Insured

Current Account

A/P N/A

Monthly fee of $0

They are FDIC Insured

Chime Checking Account

APY N/A

Monthly fee of $0

Member FDIC

Axos Bank(r) Rewards Checking

APY 1.25% Make monthly direct deposits of $1500 plus to receive 0.40 percent APR. Use your Axos Visa(r) debit card for a maximum of 10 transactions per monthly (min 3 cents per transaction) or sign up for Account Aggregation/Personal Financial Manager (PFM) within Online Banking to earn 0.30% annual percentage. Maintain an average daily amount of $2,500 on An Axos Managed Portfolios Invest Account to earn 0.20 percent APY. Keep an average daily balance of $2,500 per month in the Axos Self-Directed Trading Investment Account to earn 0.20 percent APY. Use your Rewards Checking account to make your full monthly Axos Consumer loan payment to earn 0.15% APR.

Monthly fee of $0

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

Money market accounts pay rates similar to savings accounts and have some checking features.

Member FDIC

UFB Best Money Market

APY 4.21 percent

Min. balance for APY $0

Member FDIC

The Discover Bank Money Market Account

APY 3.20 percent

Min. balance to APY $1

How can I set up an emergency savings account?

Determine the amount you would like to save. Follow the steps below if you require assistance in calculating the expenses you will incur for six months.

Make a goal for your savings each month. This will allow you to get to the habit of saving often and makes the task easier. One way to achieve this is by automatically transferring funds into your savings account each time you get paid.

Move money into your savings account automatically. If your employer offers direct deposit, there’s a good possibility that they will divide your paycheck between multiple savings and checking accounts, ensuring that your monthly savings goal is achieved without touching the checking accounts of your account.

Save the money. Utilize the mobile device to store each time you make a purchase. You can connect with checking accounts or other types of spending accounts to round up the purchase amounts on your transactions. The extra amount is automatically transferred into the savings account.

Save your tax refund. You get a shot at this every year- and only if you are expecting a refund. It can be an easy method to increase your emergency stash. When you file your taxes, consider having your refund deposited directly into your emergency account. You could also think about changing your deductions to have less money that is withheld. If altering your deductions are an option that is suitable for you, you could transfer the extra cash to your emergency reserve.

Examine and adjust the amount of contributions. Inspect your contributions after a few months to see how much you’re saving and then adjust as needed particularly if you’ve recently took money out of your emergency savings. On the other hand when you’ve saved enough to pay for six months of expenses , and have extra cash, you might consider investing the additional money instead.

>> Here’s what to do if you think you could be the victim of

When saving, draw a line between emergencies and everything else. When you’ve hit a reasonable threshold of emergency savings Weston says, it’s a good idea to open a second savings account for more irregular but essential items such as car repairs holidays, clothing, and vacations. If you need help staying organised, banks will allow customers to create and mark sub-accounts with different financial goals.

Everyone needs to save for the unexpected. Having something in reserve can be the difference between getting through the whims of a financial storm for a few days or slipping into deep debt.

Use this calculator to start. It will only take about a minute:

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The author’s bio: Margarette Burnette is a savings account specialist at NerdWallet. Her work has been highlighted on USA Today and The Associated Press.

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