How to build an emergency fund
Do I need an emergency fund? Yes. Even if your job is very secure, you should have some money on hand for job loss or unexpected expenses that can arise: Unanticipated travel, essential home or car repairs, unforeseen medical procedures, payroll errors, uninsured losses, etc.
How much do I need? If you are simultaneously paying off high-interest debt, build an emergency fund of $1,000 or 1 months expenses, whichever is greater and read our complete guide to paying down debt. Otherwise, the common convention is 3-6 months expenses.
Note that this is based on your spending, not your income! If you make $3k a month but spend only $2k, 3 months expenses would be $6k That spending may include things that can be cut in case of an emergency, but never forget that although you are likely able to cull some expenses in an emergency (such as cable or NetFlix), other expenses could go up (such as COBRA). The numbers here are only rules of thumb - the important thing is to consider what would be absolutely necessary for you, or your family, to survive in the case of unplanned expenses, unexpected job loss, etc.
Don't forget: -Job-hunting expenses (phone and internet bill, gas or public transit money, appropriate interview clothing and dry cleaning if necessary). -Other mandatory expenses (tuition, taxes, insurance payments, etc.) -Other sources of income - you may decide to increase or decrease the size of your e-fund if you have another source of income, such as a second job or a spouse / family member that also works and contributes to expenses.
Where to keep my emergency fund? Emergency funds must be liquid (meaning you can access them easily in an emergency, within a few days). The most common ways to hold an emergency fund are in cash or in an FDIC-insured savings or checking account. Some people opt to keep their emergency fund in money market account, CDs or I-bonds so that the money has an opportunity to grow, understanding that there may be some small early withdrawal penalties if the funds are needed urgently. If it isn't fungible [meaning it can't readily be turned into cash] such as real estate, a car, stocks, credit cards, HELOCs, and other lines of credit, it should NOT be used for emergency funds.
Tiered emergency fund strategy If you wish to have a larger emergency fund (typically 3 months or more), you may decide to keep some money in a readily available, liquid location while allocating some to a slightly less liquid, but higher-earning location. Here is one such strategy:
~1 month worth of expenses in FDIC insured checking account for most likely emergency scenarios (excludes job loss or long-term medical costs). ~2 months worth of expenses in FDIC insured savings account (enough to covers short-term job loss and insurance annual out-of-pocket max). ~3-6 months expenses in laddered I-Bonds (when using I-Bonds, your purchase is locked up for the first 12 months. Thus when using it for an emergency fund, it is necessary to gradually add money over the course of a year so that you always have some portion of the investment quickly accessible.)
If you have a more complex scenario or feel that your questions were not answered by this guide, find a financial advisor you can trust in minutes with WealthMinder.
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