What is an emergency fund?

An emergency fund is money set aside to pay for large, unexpected expenses such as:

• Unforeseen medical expenses.

• Home-appliance repair or replacement.

• Major car fixes.

• Unemployment.

Why do I need an emergency fund?

Emergency funds create a financial buffer that could help keep you afloat in a time of need without having to rely on credit cards for high-interest loans. It can be especially important to have an emergency fund if you have debt, because it can help you avoid borrowing more.

How much should I save?

The short answer: If you’re starting out, try to set aside an amount that would cover an important bill, say $500. But keep working your way up. You’ll want to max out at about half a year’s worth of expenses.

The long answer: The right amount for you depends on your financial circumstances, but a good rule of thumb is to have enough to cover three to six months’ worth of living expenses. (You might need more if you freelance or work seasonally, for example, or if your job would be hard to replace.) If you do lose your job, you could use the money to pay for necessities while you find a new one, or the funds could supplement your unemployment benefits.

Having savings can get you out of many financial scrapes. Put something away now, and build your fund over time.

Where do I put my emergency fund?

Ideally, you’d put your emergency fund in a place with easy access. Because an emergency can strike at any time, having quick access is crucial. So it shouldn’t be tied up in a long-term investment fund. But the account should be separate from the bank account you use daily, so you’re not tempted do dip into your reserves.