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Kiplinger's Personal Finance
by Miriam Cross
Emergency Funds Can Reduce Stress
Kiplinger's Personal Finance
Your savings can bail you out of a situation you may not think of as an emergency.

According to a 2018 report from the Federal Reserve, 40% of adults in the U.S. would not be able to cover an unexpected expense of $400 without scrounging up the cash by, say, borrowing from friends or family or selling something.

If I lost my job tomorrow, I would be devastated. But I know I could survive for a few months without a paycheck. Over the past few years, I’ve accumulated a stash of cash in a savings account—and left it alone. I haven’t had any financial disasters serious enough for me to drain my cache. But I feel calmer knowing the money is there.

An emergency fund can come to your rescue not only if you lose your job but also if you have an unexpected medical bill or an urgent home or car repair. It can also bail you out of a situation that you may not think of as an emergency but affects your mental health or professional growth. For example, you may decide to break the lease on an apartment because of a bad roommate situation or quit a toxic job even though you have nothing else lined up.

Get Started

Millennials who are juggling everyday expenses, student (or other) debt and retirement-account contributions may be hard-pressed to see the importance of preparing for some unknown future plight. But without an emergency fund, when a sudden expense does crop up, you may need to deplete your retirement savings or investments, skip bill payments, or carry a balance on your credit card to pay for it—and any of those could ding your financial future.

Financial planners usually recommend setting aside from three to six months’ worth of essential living expenses, including rent or mortgage payments, health insurance, transportation, and groceries. If you have a stable job, are debt-free and could move in with friends or back home in a pinch, you might be comfortable saving less. A spouse or partner’s income is another safety net. If you have children, a mortgage or lots of debt, or you earn an irregular income as a freelancer or small-business owner, you should lock down enough capital to last six months or more.

Of course, this may mean that your emergency fund should have thousands of dollars. But you don’t need to stockpile that amount all at once, especially if you are simultaneously paying down loans or beefing up your 401(k). Pam Capalad, a certified financial planner in New York City and founder of Brunch & Budget, recommends focusing on a smaller amount, such as one month’s worth of living expenses. After that, work on debt while gradually contributing to your emergency fund. If you’re feeling really stretched, keep at least $1,000 in your emergency fund at all times to bail you out of minor crises. “Otherwise, the cycle of debt will continue,” Capalad says.

The easiest place to keep your emergency fund is in an FDIC-insured high-yield savings or money market deposit account. Kiplinger’s best banks for millennials, Ally Bank and Discover Bank, both offer savings accounts that recently paid 2% or more and have no monthly fees or minimum-balance requirements.

Need more motivation? “Save for a feeling, not for a thing,” says Capalad. “Having this fund means that if something unexpected comes up, you can grieve or be emotional without stressing about the financial side or feeling stuck.” If it helps, rename your emergency fund something more positive, such as a yes fund or an opportunity fund, says Capalad. “It gives you the ability to say Yes, I can buy new tires for my car, or Yes, I can take advantage of this once-in-a-lifetime opportunity.”

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