Why an emergency fund comes first
Your first money goal, and how big it should be.
3 min read
An emergency fund is cash you save for surprises. For example: losing a job, a medical bill, or a car repair.
It stops a surprise from becoming debt. Without it, a $600 car repair can end up on a credit card at 22% interest.
How big it should be
- 1Start with $1,000Enough for many small surprises.
- 2Then 3 months of needsRent, food, utilities, insurance and transportation.
- 3Some people need 6 monthsIf your income changes month to month, you work for yourself, or your home has only one income.
Why it comes before investing
- You don't need a credit card or a loan when something goes wrong.
- You never have to sell your investments when prices are low.
- You worry less, and you make better money choices.
Where to keep it
Keep it in a high-yield savings account. It pays much more interest than a regular savings account, and your money is still safe and easy to reach.
Interest on $5,000 for one year, at example rates:
Regular savings at 0.5%$25
High-yield savings at 4%$200
Most high-yield accounts are free to open. Check that the bank has FDIC insurance, or NCUA at a credit union. Rates change, so compare a few.
Don't put your emergency fund in the stock market. Its value can drop right when you need it.
What to do with savings beyond your emergency fund