Saving for an Emergency
Create a financial safety net.
Create a financial safety net.
Saving for a rainy day is just as important as saving for a specific goal. This is the best way to protect yourself financially in case of illness, injury, or other unexpected events.
How much do you need for an emergency?
It's a good idea to keep three to six months of essential living expenses easily accessible in case of an emergency. Keep in mind that you may want to save even more in your emergency fund if you might be changing jobs within the next year or are anticipating any other significant life changes.
How to Save for an Emergency Fund
Watch video: How to Save for an Emergency Fund
On this episode of Personal Finance 101, we take a closer look at what factors to consider when saving for an emergency fund.
Where to deposit your emergency fund.
In order to have fast access to your emergency cash, keep it in something safe and liquid such as one of the following:
- Interest-bearing checking accounts may provide a slightly lower yield than money market funds, but you can write checks for any amount and may have easy ATM access to cash. And they're FDIC-insured up to $250,000 per account holder, per bank.
- Money market savings accounts may offer limited checkwriting privileges (over certain minimums) while generally providing higher yields than a checking account. Often the number of withdrawals is limited.
- Money market funds typically pay more than bank accounts (checking and savings accounts). While money market funds are considered to be a stable investment, they are not FDIC-insured, and it's possible to lose money invested in a fund.
- Short-term CDs are also FDIC-insured up to $250,000, and CDs typically offer higher yields than money market funds or interest-bearing checking accounts. Although money invested in a CD is locked up until it matures, you can always withdraw early and pay a penalty if you really need the cash.
A home equity line of credit can also be a good backup in case of emergency. However, it should always be used cautiously and only if you've built substantial equity in your home. Also, you can borrow against it when needed.
The cost of not having an emergency fund
- If you...
- Then you...
If you...Withdraw 401(k) money before you’re eligible>Then you...Pay early withdrawal penalties (10% or more)>
If you...Live off credit cards>Then you...Pay up to 18% interest (or more)>
If you...Postpone monthly payments>Then you...Pay late penalties; damage credit rating>
If you...Sell securities>Then you...Lose money if it’s a bad time in the market>
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To make sure you're getting the best value
To make sure you're getting the best value, do some comparison shopping when choosing a bank or financial institution for your emergency fund. Review and compare the following:
- Minimum balance requirements
- Service fees
- Interest rates
- How often the bank pays interest
And be sure the bank you choose is FDIC-insured. Learn more about the types of accounts available.
Money market funds are neither insured nor guaranteed by the FDIC or any other government agency. Although the fund may seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.
1. With home equity loans and lines of credit, the financial institution will take a deed of trust to secure the debt. You could lose your home if you do not meet the obligations in your agreement with the financial institution.