Emergency Fund
Definition
A cash reserve set aside to cover unexpected expenses or income loss, typically 3-6 months of essential living expenses kept in an easily accessible, low-risk account.
An emergency fund is the foundation of financial security. It's cash set aside specifically for unexpected events — job loss, medical emergencies, major car repairs, or home repairs. Without one, unexpected expenses often lead to high-interest credit card debt, retirement account withdrawals, or other financially destructive choices.
The standard recommendation is 3-6 months of essential expenses. "Essential expenses" means the minimum you need to survive: housing, food, utilities, insurance, minimum debt payments, and transportation. If your monthly essentials are $3,000, target $9,000-$18,000.
Where you keep it matters. An emergency fund should be: liquid (accessible within 1-2 days), safe (no risk of loss), and separate from your regular checking (to reduce temptation). A high-yield savings account is the ideal home — it earns meaningful interest while remaining immediately accessible.
Building an emergency fund takes priority over most other financial goals. Before investing, before extra debt payments, before lifestyle upgrades, build at least a starter emergency fund of $1,000-$2,000 to handle small emergencies. Then build to the full 3-6 months while pursuing other goals.
Single-income households, self-employed individuals, and people in volatile industries should target the higher end (6+ months). Dual-income households with stable employment may be fine with 3-4 months. If you have dependents, err on the higher side.
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Frequently Asked Questions
Should I invest my emergency fund?
No. An emergency fund should be in a low-risk, immediately accessible account like a high-yield savings account. Investing it risks having less money available exactly when you need it most — during a market downturn that may coincide with job loss.
Should I pay off debt or build an emergency fund first?
Build a small starter emergency fund ($1,000-$2,000) first, then aggressively pay down high-interest debt, then build the full emergency fund. Without even a small buffer, any surprise expense goes straight onto a credit card, undermining your debt payoff progress.