Emergency fund

An emergency fund is the money that keeps a bad month from becoming a bad year. It sits in a savings account away from the one you spend from, it is sized on what you would still have to pay if your income stopped, and it is spent only on the expenses you could not have seen coming. The fund's job is to turn an emergency into a withdrawal, so that a car repair or a gap between jobs is paid from a balance you built rather than from a card balance you will carry.

In a sentence

• "The transmission came out of the emergency fund, not the credit card."
• "Their emergency fund covers four months of essentials, so a layoff is a problem rather than a crisis."
• "Build the emergency fund to one month of essentials first. Six months is where you stop, not where you start."

How it works

1. List the expenses that would continue if your income stopped. Rent or the mortgage, utilities and phone, groceries, insurance premiums, transport, and the minimum payment on every debt. Leave out dining, subscriptions, shopping and anything else you would cut on the first day.
2. Add them up. That total is one month of essentials, and it is the unit the fund is measured in.
3. Set the first target at one month, and the final target at three to six months, depending on how steady your income is and how many people depend on it.
4. Fund it with a fixed transfer on payday, the same amount every month, into a savings account you do not spend from.
5. Spend it only on emergencies, and refill it first afterward. The transfer restarts the month after a withdrawal.

Target = monthly essentials × months of cover

The fund is measured in essentials rather than income because essentials are what an emergency has to cover. A household that spends $5,200 a month but could live on $2,915 needs a fund sized on the second figure.

An example

At $400 a month, the first target is reached in eight transfers, and the fund covers one month of essentials before the year it was started in is out. Three months takes about twenty-two transfers from zero and six months about forty-four, which is why the target is raised one month at a time rather than set at six months on day one.

Why it matters

Without a fund, every emergency is financed. A $1,200 repair put on a card at 24.99% APR and paid off at $100 a month takes about fourteen months and costs roughly $195 in interest, and the next emergency lands on top of it. With a fund, the same repair is a withdrawal, refilled at $400 a month over three months, with no interest and no new balance. The fund also changes decisions that are not emergencies: a job that can be left, a move that can be made, a bad month that does not have to be explained to a lender.

Emergency fund versus sinking fund

An emergency fund is for the expenses you could not see coming; a sinking fund is for the ones you could. Car insurance, the holidays, and a laptop that is visibly wearing out are sinking funds, each with a size and a date. The job loss, the transmission and the flight home are the emergency fund's. Households that use one fund for both find it empty when the real emergency arrives, because the planned expenses drained it first. See Sinking fund.

Common questions

How much should an emergency fund be? Three to six months of essential expenses is the usual range, sized on what you would have to keep paying if income stopped rather than on your full spending or your income. One income, dependents, or variable pay argue for the higher end; two steady incomes for the lower. Start at one month and raise the target from there.

Where should I keep it? In a savings account separate from the checking account you spend from, where it earns interest and cannot be spent by accident. It should not be invested, because the day you need it may be the day the market is down, and it should not be cash at home.

Should I build an emergency fund before paying off debt? Most approaches put a small starter fund first, one month of essentials or less, so that the next surprise does not go straight back on the card, and then run the debt payments and the rest of the fund side by side. Which of the two gets the larger share turns on the interest rate of the debt.

What counts as an emergency? An expense that is necessary, unexpected and urgent, all three. The transmission qualifies; the holidays are expected, a sale is not necessary, and a bill you knew the date of is a sinking fund that was never built.

Is a rainy-day fund the same thing? The terms are often used interchangeably. When they are distinguished, a rainy-day fund is the smaller cushion for the $300 surprises and the emergency fund is the months-of-expenses reserve for the large ones; the mechanics are the same.

Go deeper

• How to build an emergency fund inside a monthly budget makes the transfer a line in the budget and sizes the first target.
• The Emergency fund calculator turns your essentials, months of cover and monthly contribution into a target and the time it takes to reach it.
• How to budget after a pay cut or job loss covers the month the fund was built for.

Where it shows up in Zypper

Zypper keeps the transfer out of your spending and the balance in your net worth. When money moves between your own accounts, both sides show up as transactions, and Zypper links them as one transfer so they never read as income and spending or distort your cash flow. The savings account's balance is charted in your net worth over time, so the fund's growth shows as a line rather than a number you check. On the budget page, Left to budget is your expected income minus everything you have budgeted for spending, which tells you before the month starts whether the plan leaves room for the transfer. See Splitting and linking transactions, Net worth tracking, and Cash flow for the details, or get started with Zypper to see the room your budget has for a fund.