Emergency fund

Also called Rainy day fund

Cash set aside to cover unexpected expenses or a loss of income without borrowing or selling investments.

What it means

An emergency fund is money reserved for genuine surprises: a job loss, a medical bill, an urgent car or home repair. It is kept separate from everyday spending money so it is not drained by accident.

A common guideline is three to six months of essential expenses, though people with unstable income, a single household earner or dependents often aim higher. Because the point is quick access, the money is usually kept somewhere safe and liquid, such as a savings or money market account, rather than in stocks that could be down when the cash is needed.

Example

Suppose your essential costs (housing, food, utilities, insurance and minimum debt payments) total $3,000 a month. A three-to-six-month emergency fund would be $9,000 to $18,000.

How it’s used

Covering bills during a layoff or reduced work hours
Paying an insurance deductible or surprise repair
Avoiding high-interest credit card debt or payday loans in a crisis

Strengths and weaknesses

Strengths

Prevents a short-term problem from becoming long-term debt
Lowers stress and gives time to make good decisions
Lets long-term investments stay invested during downturns

Weaknesses

Cash typically earns less than long-term investments
Interest earned may not keep pace with inflation
Can be tempting to dip into for non-emergencies

Good to know

Start with a smaller first target, such as one month of expenses, then build from there.
Keep it at an insured institution and in an account separate from checking.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.