What is an Emergency Fund?

An emergency fund is an amount of money set aside to cover unexpected financial surprises. The typical amount of an emergency fund can depend on many different factors including income stability, debt obligations, and other savings and investments on hand.

Milestone 1: $1,000
Milestone 2: 1 Month of Living Expenses
Milestone 3: 3-6 Months of Living Expenses

A good rule of thumb is to start with a goal of $1000. When that goal has been accomplished a logical next step would be saving at least 1 month of typical living expenses. This will provide a decent cushion if anything were to arise in the interim. The end goal would be to establish an emergency fund with at least 3 – 6 months of typical living expenses depending on occupation & cost of living. Although this may seem daunting at first, the hardest part is the first step.

What should the funds be used for?

While this may seem simple, most individuals find the answer to this question very ambiguous. Here are some options that the funds should be used towards:

  • Expenses incurred after a job loss
  • Unplanned medical expenses
  • Unexpected Home repairs
  • Car repairs outside of regular maintenance

The key similarity to each one of the options above is that fact that they are all unexpected, and could easily throw a wrench into any monthly budget.

What should the funds NOT be used for?

  • That new iPhone
  • A night out with friends
  • Your mid-afternoon $5 specialty latte
  • That pair of shoes that you just can’t live without

Where should I keep the funds?

No, a shoebox under your bed is not the best place to keep your emergency fund, but these places are great alternatives:

A high-yield savings account that can be opened online offered from banks like Goldman Sachs or Ally Bank are both great options that offer industry-leading interest rates while charging no fees or requiring minimum account balances. It also takes only a few minutes to set these accounts up, and they both offer automated savings options.

Another great option would be in a money market fund offered from a budget broker like Vanguard. These types of accounts are ultra-low risk, but as a result, come with lower rates.

Summary

The goal of an online account separated from your main checking account or bank is to make these funds harder to reach on a day-to-day basis. This will encourage smart use of the funds for emergency purposes only. When the time arises and the funds need to be used, try to systematically replace the funds to ensure that you stay covered.

Combining your emergency fund with a detailed monthly budget and a simple renters insurance plan from a low-cost provider like Lemonade could mean the difference between financial freedom or a life debt and dismay.