Have you ever had one of those months? The water heater stops heating, the dishwasher stops washing, and your family ends up on a first-name basis with the nurse at urgent care. Then, as you're driving to work, you see smoke coming from under your hood.
Bad things happen to the best of us, and sometimes it seems like they come in waves. That's when an emergency fund can come in handy.
One survey found that nearly 25% of Americans have no emergency savings. Another survey found that 40% of Americans said they wouldn't be able to comfortably handle an unexpected $1,000 expense.1,2
How Much Money?
How large should an emergency fund be? There is no “one-size-fits-all” answer. The ideal amount may depend on your financial situation and lifestyle. For example, if you own a home or have dependents, you may be more likely to face financial emergencies. And if a job loss affects your income, you may need emergency funds for months.
Coming Up with Cash
If saving several months of income seems unreasonable, don't despair. Start with a more modest goal, such as saving $1,000, and build your savings a bit at a time. Consider setting up automatic monthly transfers into the fund.
Once your savings begin to build, you may be tempted to use the money in the account for something other than an emergency. Try to resist that urge. Instead, budget and prepare separately for bigger expenses you know are coming.
Where Do I Put It?
Many people open traditional savings accounts to hold emergency funds. They typically offer modest rates of return.
The Federal Deposit Insurance Corporation (FDIC) insures bank accounts for up to $250,000 per depositor, per institution, in principal and interest.3
An attractive alternative to a traditional savings account (while still maintaining FDIC protection) is an online savings account. These types of accounts typically offer higher rates of return. One thing to consider is there is typically a one- or two-day delay in transferring funds from an online savings account to your checking account.
Depending on the size of your emergency fund, one could consider government I bonds as a portion of the war chest. These bonds have some restrictions, so they likely aren't appropriate for your entire emergency fund. Please let us know if you have questions about where you should maintain your emergency fund.
The only thing you can know about unexpected expenses is that they're coming. Having an emergency fund may help to alleviate stress and worry that can come with them. If you lack emergency savings now, consider taking steps to create a cushion for the future.
Footnotes and Sources
1. MarketWatch.com, 2020
2. Bankrate.com, 2021
3. FDIC.gov, 2022