The term “emergency fund” refers to savings that people can use to cover unexpected expenses or to provide a buffer in times of financial hardship. <\/p>\n\n\n\n
The purpose of an emergency fund is to improve financial security by creating a safety net that can be used to cover unforeseen expenses such as illness or home renovation.<\/p>\n\n\n\n
The assets in an emergency fund are typically cash or other highly liquid assets. <\/p>\n\n\n\n
An emergency fund reduces the need funding from high-interest debt options such as credit cards or unsecured loans. It also provides a buffer for future financial security as it can keep you from having to reach for retirement funds.<\/p>\n\n\n\n
The process to set up an emergency fund is straightforward. It involves putting aside money to be used in times of financial difficulties. <\/p>\n\n\n\n
This may include losing your job, a devastating illness, or major home or car repair. <\/p>\n\n\n\n
The ideal balance for an emergency fund depends on many factors. These include your personal financial situation, expenses, lifestyle, and debts. <\/p>\n\n\n
Many financial advisers recommend that you save enough to cover your expenses for three months<\/strong> or more, which can help you get through modest health care bills or short-term unemployment.<\/p><\/div>\n\n\n However, some experts make the case for an even larger emergency fund.<\/p>\n\n\n\n Celebrity finance guru Suze Orman, for example, suggests an emergency fund that can support up to eight months\u2019 worth of expenses.<\/p>\n\n\n\n The recent COVID-19 pandemic is a clear reminder of just how sudden and deep an economic crisis can be.<\/p>\n\n\n\n Individual circumstances will also dictate the level of savings that makes each person comfortable. For example, a single adult with no children may be content with three months of expenses in an emergency fund, while a single-income family may want to hold six months or more.<\/p>\n\n\n\n Research shows that many Americans are significantly short of the recommended range. <\/p>\n\n\n\n In fact, a 2019 Federal Reserve survey found that only 63% of Americans would be able to cover an expense of $400 or more with their cash or cash equivalents.<\/p>\n\n\n\n If you live paycheck to paycheck, you can start with a more modest goal such as contributing 2% of your net income to an emergency fund. Getting started with an emergency fund is important and then you can slowly increase your contributions over time. <\/p>\n\n\n\n Even a modest safety net will provide some time and peace of mind if you face an unforeseen financial crisis.<\/p>\n\n\n Important<\/strong>: It might seem tempting to use your emergency fund for incidental purposes, but it is best to use the funds only when absolutely necessary.<\/span><\/p><\/div>\n\n\nHow to Start an Emergency Fund<\/h2>\n\n\n