How to save for an emergency

It may be easier than you think to be prepared for an emergency. Here are four tips.

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The forecast says rain? You pack an umbrella, just in case. Car has a flat tire? Good thing you keep that spare in your trunk. But what happens if your car breaks down or you unexpectedly lose your job? Do you have a "just-in-case" fund set aside?

Maybe not. More than four in 10 Americans couldn’t come up with $2,000 in cash in the event of an emergency, according to a study by The Pew Charitable Trusts.1 Here are four key questions to ask yourself to help make sure you are one of the six in 10 who can.

1. How much do you need?

Fidelity suggests setting aside at least three to six months' worth of living expenses. If you’re single and on your own but have family backup, you might be comfortable with three months of savings. However, if you have a spouse, kids, and a mortgage to support, you might sleep better with six months or even more.

2. How to come up with the cash?

There are a couple of ways to boost savings—even on a tight budget.

Think of your emergency savings fund as a bill. With rent or mortgage payments, contributing to a retirement fund, and myriad living expenses, you already have a lot to balance. But if you turn saving for an emergency fund into a monthly priority, you’ll get in the habit of contributing to it regularly.

Save an inheritance or gifts. Not everyone has a wealthy great uncle, but if yours happens to leave you some money, don’t fritter it all away. Consider using it to start your emergency fund and invest what is left over for other savings goals.

3. Where’s a place to stash the savings?

While a traditional savings account may seem like a convenient place to keep your emergency fund, keep in mind that many earn less than 0.25%2 in interest. Plus, you may be tempted to tap into it if it’s sitting with the rest of your money. Consider the following alternatives:

Money market funds tend to be a lower-risk place to store your cash, and generally offer better rates than your typical savings account. Unlike savings accounts, money market funds are not FDIC-insured.

Certificates of deposit (CDs). The draw of CDs is that they may offer even better rates than money market funds—but there is a catch. Many penalize you for taking money out before the CD matures. CDs may be a solution for a portion of your emergency fund but beware of tying up all your savings—a vital component of your rainy-day fund is liquidity. (Tip: Compare CD rates.)

4. How to protect yourself with insurance?

Besides having cash that you can access in an emergency, insurance is another way to be prepared for one. Consider these two types: term and permanent. Just like it sounds, a term insurance policy covers a defined period of time while a permanent life insurance policy is with you until death, as long as you pay the premiums.

Look into disability insurance. Whether you have it through work or on your own, you’ll want to know that you have enough in the event something happens.

Don’t forget about health insurance. If you lose your job, your health coverage goes with it. Factor in some additional money to cover the cost of health care, just in case.

The bottom line

Everyone needs an emergency fund—no matter how old you are or what your income level is. And if you’re diligent about saving for it, you’ll be ready for anything—rain or shine.

Learn more

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Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
1. The Pew Charitable Trusts, "The Role of Emergency Savings in Family Financial Security: What Resources Do Families Have for Financial Emergencies?"
2. The national average money market and savings account annual percentage yield (APY) was 0.11% as of 03/11/2016 according to Bankrate.com.
You could lose money by investing in a money market fund. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Corporation or any other government agency. Before investing, always read a money market fund’s prospectus for policies specific to that fund.
Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Your ability to sell a CD on the secondary market is subject to market conditions. If your CD has a step rate, the interest rate of your CD may be higher or lower than prevailing market rates. The initial rate on a step rate CD is not the yield to maturity. If your CD has a call provision, which many step rate CDs do, please be aware the decision to call the CD is at the issuer's sole discretion. Also, if the issuer calls the CD, you may be confronted with a less favorable interest rate at which to reinvest your funds. Fidelity makes no judgment as to the credit worthiness of the issuing institution.
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