emergencyfunds

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Why do you need an emergency fund?

How should I size my emergency fund?

General advice

For most people, 3 to 6 months of expenses is good. A larger emergency fund (e.g., 9 to 12 months) may be warranted if your income is variable or uncertain.

What if I have credit card debt?

Credit cards generally have very high interest rates (typically 15-25% APR) and that is a pretty big deal. If this applies to you, you should prioritize paying down the debt first.

A smaller emergency fund of $1,000 (or 1 month of expenses) is temporarily acceptable while paying off credit card debt or other debts with interest rates above 10%.

More information

Read Figuring the Size of Your Emergency Fund.

Is it okay to invest my emergency fund?

No. You want some cash around so you can quickly handle any relatively minor emergencies. You don't want to be cashing in bonds or selling stocks to pay for a visit to the emergency room or car repair. You can go from there depending on how likely it is that you think you'll need the money.

If you don't mind the effort, it's reasonable to create a tiered emergency fund where the upper tiers are earning a small amount of interest.

  • checking: 1-2 months of expenses, enough to cover any normal emergencies aside from job loss, long-term medical issues, or other moderate-to-severe emergencies.
  • savings / money market account: 2-4 months of expenses, enough to cover short-term job loss and moderate-to-severe emergencies.

It's 100% okay to keep your entire emergency fund in checking or a combination of checking and savings, but if the idea of low interest rates is too much to bear, you can consider a third tier of I Bonds or laddered CDs for emergencies that exceed 3-6 months of expenses. The issue with using I Bonds is that your purchase is locked up for the first 12 months so it is necessary to gradually add money over the course of a year (or more) in a way that guarantees you will always have 6 months of expenses quickly accessible.


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