EMERGENCY FUND

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What Is an Emergency Fund?

The term “emergency fund” refers to money stashed away that people can use in times of financial distress. The purpose of an emergency fund is to improve financial security by creating a safety net that can be used to meet unanticipated expenses, such as an illness or major home repairs.

Assets in an emergency fund tend to be cash or other highly liquid assets. This reduces the need to either draw from high-interest debt options, such as credit cards or unsecured loans or undermine your future security by tapping into retirement funds.

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Key Takeaways

  • An emergency fund is a financial safety net for future mishaps and/or unexpected expenses.
  • Emergency funds should typically have three to six months’ worth of expenses, although the 2020 economic crisis and lockdown has led some experts to suggest up to one year’s worth.
  • Individuals should keep their emergency funds in accounts that are easily accessible and easily liquidated.
  • Savers can use tax refunds and other windfalls to build up their funds.