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Emergency Fund: What It Is and why it is important

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Emergency Fund What is it and Why It’s Important

Best kept in a savings account, an emergency fund is useful to cover unexpected costs.

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

Dec 21, 2021

Review 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 as a speaker and author. As an expert in finance psychology Kathleen is a regular on the television and her work has been published by The New York Times, The Wall Street Journal, “PBS NewsHour,”” Money magazine, Today Money, Forbes and CNBC. Kathleen served as an adjunct faculty member of McCallum Graduate School from 2009 to 2019. McCallum Graduate School at Bentley University from 2009 until 2019. She is currently teaching at Champlain College.

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What exactly is an emergency fund?

An emergency fund is a type of bank account with money put aside to cover large, unexpected expenses, such as:

Unforeseen medical expenses.

Home-appliance repair or replacement.

Major car repairs.

Unemployment.

Compare the best savings accounts

Find a savings account with a high yield with a great rate. Compare rates against each other.

What is the reason I should have an emergency account?

The emergency fund is an financial buffer that could help you stay afloat during a emergency without the need to depend on credit cards or high-interest loans. It can be especially important to have an emergency fund in case you are in debt because it can aid in avoiding borrowing more.

“One one of the most important steps to climb from debt to provide yourself a way not to go further into the debt cycle,” says NerdWallet columnist Liz Weston.

How much should I save?

The quick answer is: If you’re beginning small, set aside at least $500, then begin to build up to half a year’s cost of living expenses.

The long answer is that the right amount you should spend depends on your financial situation However, a good rule of thumb is to to cover three to six months’ worth for living expenses. (You may require more in case you are a freelancer or working seasonally, for example or if your position will be difficult to get replaced.) If you are forced to quit the job you have, then you could use the money to purchase necessities until you find a new one, or the funds could supplement your unemployment benefits. Start with a small amount, Weston says, but start.

Even a small amount of savings will help you get out of many financial scrapes. Save something now and build your money over time.

>> Looking for top savings alternatives? Here are our picks for you .

Where should I put my emergency fund?

A savings account with the highest rate of interest and quick access. Because an emergency can occur at any moment and access to it quickly is vital. Therefore, it should not be tied in a long-term investing fund. The account should however be separate from the account at your bank that you use daily, so you’re not tempted to draw funds from your account.

A is a great location to store your money. It is insured by the federal government up to $250,000 per depositor, which means it’s protected. The money earns you interest and you’ll be able to access cash quickly when needed either through withdrawal or a funds transfer.

Savings Cash Management CD Checking Money Market

Member FDIC

SoFi Checking and Savings

APY 3.75% SoFi members with direct deposit can get up to 3.75 percent per year in 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 needed to qualify for 3.75% APY for savings, and 2.50% APY on checking balances. Customers who do not deposit direct deposits will earn 1.20 percent APR on all balances in checking and savings (including Vaults). The rates of interest are variable and subject to change at any point. The rates shown 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 from Goldman Sachs Online Savings Account

APR 3.50 35% 3.50% APR (annual percent yield) with a minimum balance of $0 to earn the stated APY. Accounts must have an active balance in order to remain open. APY valid as of 02/07/2023.

Min. balance required for APY $0

The cash accounts offer features and services that are that are similar to savings, checking and/or investment accounts in one product. These accounts for managing cash are generally offered by non-bank financial institutions.

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

on the Wealthfront website.

Wealthfront Cash Account

APY 4.05%

Min. balance for APY $1

on Betterment’s site

Betterment Cash Reserve – Paid non-client promotion

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

Min. balance required for APY $0

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

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

CIT Bank CD

APY 4.60%

Time 1.5 years

Member FDIC

Marcus By Goldman Sachs High-Yield CD

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

1. Year of the term

Checking accounts can be used 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 Checking and Savings

APY 2.50 Members of SoFi with direct deposit earn up to 3.75 per cent annual percentage yield (APY) on savings balances (including Vaults) and 2.50 percent APY on their checking balances. No minimum direct deposit amount that is required to be eligible for 3.75% APY for savings and 2.50 percent APY on checking balances. Direct deposit members will earn 1.20 percent APR on all balances, including savings and checking (including Vaults). The rates of interest are variable and can change at any point. These rates 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

APY N/A

Monthly fee of $0

They are FDIC Insured

Current Account

APR N/A

Monthly fee $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% Receive monthly direct deposits of $1500 and more in order to accrue 0.40% annual percentage. Make use of your Axos Visa(r) Debit Card for a total of 10 transactions each month (min three dollars per purchase) or sign up for Account Aggregation/Personal Finance Manager (PFM) within Online Banking to earn 0.30 percent APR. Maintain an average daily amount of $2,500 in the Axos managed Portfolios Investment Account in order to receive 0.20 percent annual percentage yield. Maintain an average daily balance of $2,500 per month with An Axos Self-Directed Trading Invest Account for 0.20 percent annual percentage yield. Use your Rewards Checking account to pay your full each month Axos Consumer loan payment to earn 0.15 percent APR.

Monthly fee $0

Money market accounts pay rates that are similar to savings accounts, and come with some checking features.

Money market accounts pay rates that are similar to savings accounts, and come with some features for checking.

Member FDIC

UFB Best Money Market

APY 4.21%

Min. balance required for APY $0

Member FDIC

Bank Money Market Account – Discover Bank Money Market Account

APY 3.20%

Min. balance for APY $1

How can I set up an emergency cash fund?

Calculate the total that you want to save. Use the below if you require assistance in calculating your expenses for six months.

Set a monthly goal for savings. This will get you to the habit of saving frequently and make the process less difficult. One way to do this is by automatically transferring money to your savings account every time you receive a payment.

Move money into your savings account automatically. If your employer allows direct deposit, there’s a great chance that they’ll be able to divide your salary between several savings and checking accounts, ensuring that your monthly savings goal is taken care of without touching the checking accounts of your account.

Save the money. Make use of smartphones to make savings every time you make a purchase. There are that link with checking accounts or other types of spending accounts to round up total amount you spend on purchases. The additional amount is then automatically transferred into a savings account.

Keep the tax rebate. You can only get this every year only if you are expecting to receive a tax refund. Saving it can be an easy way to build your emergency stash. If you have to file your taxes, you may want to have your refund directly deposited into your emergency fund. Alternatively, you can consider making adjustments to your tax deductions so that you have less money withheld. If changing your deductions is a good option for you, you can put the extra money into your emergency fund.

Review and adjust your contributions. Review your contribution after a few months to see how much you’re saving and adjust , if necessary, especially if you recently took money out of your emergency savings. On the other hand when you’ve saved enough to cover 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 may have

When saving you should draw a line between emergencies and other. If you’ve reached a certain amount of emergency savings, Weston advises, it’s best to open a second savings account for irregular but inevitable items, such as car repairs or vacations, as well as clothing. If you require help to stay organized, many banks permit customers to establish and label sub-accounts for various financial goals.

Everyone needs to save for the unexpected. The ability to have a reserve fund could be the difference between getting through an economic storm that is short-term or falling into deep debt.

Utilize this calculator to get started. It takes only just a few minutes

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About the author: Margarette Burnette is a savings account specialist at NerdWallet. She has had her work highlighted by USA Today and The Associated Press.

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