What Is an Emergency Fund and Why Do You Need One?

Part of improving your financial health is having an ample emergency fund. This money, set aside to help you in case of the unexpected, is even more important in a time when more people are at risk of illness and job loss. Though there are plenty of reasons for having an emergency fund, prevention of debt is among the most important.

If you don’t have an emergency fund, not to worry — we’ll break down what it is, why you need one, and how large it should be.

What is an emergency fund?

An emergency fund is money you set aside in savings earmarked for emergencies. This money needs to be fairly liquid — that is, you need to be able to access it quickly and easily.

Emergency funds are used for:

  • Job loss
  • Medical emergencies
  • Unexpected car repairs
  • House repairs

Of course, there are other types of emergencies. No matter what, the fund is there for unplanned events, as in, not for your semi-annual car insurance payments, or for holiday gifts — expenses that are anticipated, and should come from other sources.

Why do I need an emergency fund?

Emergency funds can be thought of as a self-funded insurance policy of sorts. Instead of paying an insurance company, you’re paying yourself by setting aside these funds for the future.

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For example, if you lose your job, you’ll have enough money set aside to pay for your expenses until you find another regular income source. Or if you know your car is going to rack up a lot of mileage, your emergency fund helps you prepare for the possibility of mechanical issues down the road.

An emergency fund is especially important if you don’t have family members nearby who can help you in a pinch. You can feel safe knowing that if you need cash quickly, it’ll be waiting for you.

How much do I need to save?

Your emergency fund and the amount of money you need depends on factors such as your current income and what your recurring expenses are. Most experts recommend setting aside an average emergency fund of three to six months’ worth of expenses. However, if you have a job title like freelancer or gig worker, or you work on commission, you might want to set aside even more.

To figure out how much you need in an emergency fund — aka the exact amount you need — look at how much you spend per month on your necessary expenses such as rent, utilities, and food. Once you’ve determined your monthly expenses, just multiply that by three to six months.

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Some people choose to save up three to six months of income, instead of three to six months of expenses. This is a more challenging goal — but can provide extra padding in case of larger emergencies. So, if you usually make $3,000/month, you would save $9,000 for a three-month emergency fund.

Ultimately, how much to have in an emergency fund is up to you and how much you need for your bare necessities. Use our calculator below to estimate how much you should save for a 6 month emergency fund.

View more information: https://www.fool.com/the-ascent/banks/what-emergency-fund/

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