Emergency Fund: What It Is and why it is important

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Emergency Fund The Emergency Fund: What Is It and Why It’s Important

The best place to keep it is the savings account, an emergency fund is useful to cover unexpected costs.

By Margarette Burnette, Senior Writer Savings accounts, money market accounts, banking Margarette Burnette is an specialist in saving and has written about bank accounts since before when the Great Recession. Her work has been published in major newspapers. Before joining NerdWallet, Margarette was a freelance journalist with bylines in magazines like Good Housekeeping, and Parenting. She is based near Atlanta, Georgia.

Dec 21, 2021

Review by Kathleen Burns Kingsbury Wealth psychology expert and coach Kathleen Burns Kingsbury, founder of KBK Wealth Connection and host of the Breaking Money Silence podcast, is a widely known as a speaker and author. As an expert in the psychology of money, Kathleen was featured on TV, and her writing has been featured on The New York Times, The Wall Street Journal, “PBS NewsHour,”” Money magazine, Today Money, Forbes and CNBC. Kathleen worked as an adjunct faculty member at McCallum Graduate School from 2009 to 2019. McCallum Graduate School at Bentley University from 2009 until the year 2019 and currently teaches in the college of Champlain College.

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What is an emergency fund?

An emergency fund is a type of bank account that is put aside to cover large, unexpected expenses, such as:

Unforeseen medical costs.

Repair or replacement of your home appliance.

Major car fixes.


Compare the top savings accounts

Find a savings account with a high yield that offers a competitive rate. Compare rates side-by-side.

Why do I require an emergency fund?

Emergency funds create a financial buffer that can keep you going in moment of crisis without the need to depend upon credit card or higher-interest loans. It can be especially important to keep an emergency fund in place if you are in debt because it could help you avoid borrowing more.

“One among the initial steps to climb out of debt is to give yourself the option to not be further in debt,” says NerdWallet columnist Liz Weston.

How much should I save?

The quick answer is: If you’re starting out small, save at least $500, and begin to build up to a half-year’s cost of living expenses.

The answer is long and complicated: The right amount for you is contingent on your financial situation However, a best practice is to to cover three to six months in living costs. (You may require more in case you freelance or work seasonally for instance or if you lose your job is difficult to replace.) If you are forced to quit the job you have, then you could utilize the money to pay for necessities while you search for a replacement or supplement your unemployment benefits. Start with a small amount, Weston says, but begin.

Having even $500 saved will help you get out of many financial scrapes. Save something now, and build your money over time.

Looking for the top savings choices? Here are our recommendations for you .

Where should I put my emergency fund?

Savings accounts that have a high rate of interest and quick access. Since emergencies can occur at any moment and access to it quickly is essential. Therefore, it should not be tied to a long-term investment fund. But the account should be distinct from the bank account that you are using every day, so that you don’t have the temptation to dip into your reserves.

A is a safe place for your money. It is insured by the federal government up to $250,000 for each depositor, which means it’s protected. The money earns you interest and you’ll be able to access funds quickly via withdrawal or a funds transfer.

Saves CD Management Checking Money Market

Member FDIC

SoFi Checking and Savings

APY 3.75 Per cent SoFi members with direct deposit earn up to 3.75% annual percentage yield (APY) on savings balances (including Vaults) and 2.50% APY on checking balances. The minimum direct deposit amount needed to qualify for 3.75 percent APY on savings, or the 2.50% APY for checking balances. Members without direct deposit will get 1.20 percent APY on all account balances, including savings and checking (including vaults). Rates of interest are subject to change and may change at any time. The rates shown are current as of 01/04/2023. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet

Min. balance to APY $0

Member FDIC

Marcus is a product of Goldman Sachs Online Savings Account

APR 3.50% 3.50% APY (annual percent yield) with no minimum balance to earn stated APY. Accounts must be in an active balance in order to remain open. APY current as of 02/07/2023.

Min. balance to APY $0

These cash accounts combine features and services that are similar to savings, checking or investment accounts into one account. These accounts for managing cash are usually provided by non-bank financial institutions.

The cash accounts offer features and services that are that are similar to checking, savings and/or investment accounts into one package. Cash management accounts are generally offered by non-bank financial institutions.

on the website of Wealthfront.

Wealthfront Cash Account

APY 4.05 percent

Min. balance to APY $1

on Betterment’s website

Betterment Cash Reserve – Paid non-client promotion

APY 4.00 percent Annual percent yield (variable) is at 02/06/2023.

Min. balance to APY $0

CDs (certificates of deposit) are a kind of savings account that comes with an interest rate fixed and a term generally, they offer higher interest rates than traditional savings accounts.

CDs (certificates of deposit) are a kind of savings account with a fixed rate and term, and usually have higher interest rates than standard savings accounts.


APY 4.60 percent

Time 1.5 years

Member FDIC

Marcus By Goldman Sachs High-Yield CD

APY 4.40% 4.40% APY (annual per cent yield) as of 01/25/2023

1. Year of the term

Checking accounts are used for day-to-day cash deposits and withdrawals.

Checking accounts are used to make daily cash deposits as well as withdrawals.

Member FDIC

SoFi Checking and Savings

APY 2.50 Members of SoFi with direct deposit receive up 3.75 per cent annually-percentage yield (APY) on savings balances (including Vaults) and 2.50% APY on check balances. There is no minimum direct deposit amount required to qualify for the 3.75% APY for savings and 2.50% APY on checking balances. Members without direct deposit will earn 1.20% APY on all account balances in checking and savings (including Vaults). Rates of interest are subject to change and subject to change at any time. These rates are current as of 01/04/2023. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet

Monthly fee of $0

Upgrade Rewards Checking


Monthly fee $0

They are FDIC Insured

Current Account


Monthly fee $0

They are FDIC Insured

Chime Checking Account


Monthly fee of $0

Member FDIC

Axos Bank(r) Rewards Checking

APY 1.25% Make monthly direct deposits totaling $1,500 or more to earn 0.40 percent APY. Use your Axos Visa(r) debit card for a maximum of 10 transactions each month (min $3 per transaction) or sign up for Account Aggregation/Personal Financial Manager (PFM) within Online Banking to earn 0.30 percent annual percentage. Keep an average daily amount of $2,500 on An Axos Managed Portfolios Invest Account in order to receive 0.20 percent APY. Keep an average daily amount of $2,500 within an Axos Self Directed Trading Investment Account in order to receive 0.20 percent annual percentage yield. Use Your Rewards Checking account for your entire month’s Axos Consumer loan payment and earn 0.15% per annum.

Monthly fee $0

The money market accounts have rates similar to savings accounts. They also have some checking features.

Money market accounts pay rates similar to savings accounts and have certain checking features.

Member FDIC

UFB Best Money Market

APY 4.21%

Min. balance for APY $0

Member FDIC

Discover Bank Money Market Account

APY 3.20%

Min. balance to APY $1

How can I create an emergency savings account?

Calculate the amount you want to save. Utilize the following formula if require assistance in calculating your expenses for the next six months.

Make a goal for your savings each month. This will help you get to save frequently and make the task less daunting. One way to achieve this is to automatically transfer funds into your savings account each time you receive a payment.

You can transfer money to your savings account automatically. If your employer offers direct deposit, there’s a good possibility that they will divide your paycheck between multiple checking and savings accounts so that your savings goal for the month is met without having to touch your checking account.

Save the change. Use the mobile device to store each whenever you make a purchase. There are that link with checking or other spending accounts to round up total amount you spend on purchases. The extra amount is automatically transferred into the savings account.

Save your tax refund. It is possible to get this once a year – only if you are expecting to receive a tax refund. It can be an easy method to increase your emergency stash. If you have to file your taxes, you may want to have your refund transferred directly to your emergency account. Alternatively, you can consider making adjustments to your tax deductions to have less amount of money that is to withhold. If changing your deductions is a good option for you, you can put the extra money into your emergency fund.

Assess and adjust contributions and adjust. Review your contribution after a few months to see how much you’re saving and adjust , if necessary especially if you’ve recently withdrew money from your emergency fund. However If you’ve saved enough to be able to cover the cost of six months of expenses , and have extra cash you could consider making investments with the extra funds instead.

Here’s what you should do if you think that you may have

When you’re saving money, draw a line between emergencies and other. If you’ve reached a certain amount of emergency savings Weston suggests it’s a good idea to open a second savings account to save for sporadic but inevitable items, like car repairs, vacations and clothing. If you’re struggling to stay organised, banks will permit customers to set up and mark sub-accounts with different financial goals.

Every person should save money to cover the possibility of an unexpected. The ability to have a reserve fund could be the difference between getting through a short-term financial storm or slipping into deep debt.

Use this calculator to begin. It will only take about a minute:

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Author bios: Margarette Burnette is a savings account specialist at NerdWallet. Her work has been featured in USA Today and The Associated Press.

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