- Save at least 3 to 6 months' worth of necessary expenses by funding your emergency savings account regularly, as you would pay a bill.
- Consider saving in an account that pays some interest but preserves liquidity.
- To really be prepared for anything, be sure to keep health and disability insurance coverage.
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 4 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 4 key questions to ask yourself to help make sure you are one of the 6 in 10 who can.
1. How much do you need?
Fidelity suggests setting aside at least 3 to 6 months' worth of living expenses. If you're single and on your own but have family backup, you might be comfortable with 3 months of savings. However, if you have a spouse, kids, and a mortgage to support, you might sleep better with 6 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.
- Read Viewpoints on Fidelity.com: What to do with a windfall
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.
- Read Viewpoints on Fidelity.com: Get more yield on your cash
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.
- Read Viewpoints on Fidelity.com: 4 important questions to ask about life insurance
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.
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