Life has a way of throwing you a curve. Everything’s going along fine and then the water heater breaks. Your car or furnace breaks down. Bad weather blows in. An extended illness or job loss dries up your steady stream of income. The only thing predictable about these expensive complications is that they will happen.
That’s why an important part of any financial system is a plan for emergencies. Yet, most families don’t have one. The Financial Industry Regulatory Authority’s National Financial Capability Study found only 46% of Americans have rainy-day funds that can cover expenses for the next quarter, in case of sickness, job loss, or financial downturn1. This is up from 40% in 2012, but it is still low, given the near-certainty of financial surprises.
What is an emergency fund?
An emergency fund is nothing more than a cash account with enough money in it to cover at least three to six months of expenses. It sits in a low-risk account, such as a federally insured bank savings account, where it earns interest until funds are needed.
Some people need larger emergency funds than others, especially those who are self-employed or who work in volatile industries. In some cases, it may make sense to have as much as 12 to 18 months of take-home pay set aside. Once you have the initial three to six months of expenses set aside, you can revisit your emergency fund to see if it makes sense to keep adding to it.
How to build your emergency fund
If you don’t have an emergency fund, make this the year to set one up. It’s easy, and it will do a lot for your peace of mind as well as your financial position.
To build it up, set up a savings account or a money market account. From there, add any rebates or discounts you received or set amounts budgeted from your paycheck into your emergency fund. One of the big advantages of having an emergency fund in a savings or money market account is that you can earn interest.
Suppose you budget $120 a week for groceries. If you use coupons and eat at home over the weekend, you could bring your bill down. What you save in the way can go into your emergency fund. If it’s $20 a week times 52 weeks a year, that’s $1,040, even without accounting for any interest. Another way to find money for your emergency fund is to pay off a credit card, then continue making the amount of the monthly payment to your emergency fund.
Emergency fund as part of your retirement plan
Having an emergency fund or a “rainy day fund” should be part of your retirement plan. If you have money held in reserve, it may eliminate the need to tap into your retirement plan for emergencies that may cause a penalty fee or taxes to be charged on the withdrawal. Please consult your tax or financial advisor for more information.
Consider Nationwide Money Market Account
Money market accounts typically offer higher interest rates than savings or checking accounts. And unlike CDs, money market accounts don’t come with maturity dates and early withdrawal fees, so you can access your money without a lot of limitations.
With our higher-yield money market account, you’ll find:
- You can take money out when you need it, up to six times a month*. You’ll also have access to more than 77,000 surcharge-free ATMs nationwide.
- There are no monthly maintenance fees with a $1,000 minimum daily balance. Otherwise, there is an $8 monthly service fee.
- You can link overdraft protection to your Nationwide checking account.
- Our money market accounts are FDIC insured up to $250,000 per depositor.
There is a minimum $1,000 balance required to open a money market account. Funds can be added anytime. Online and mobile banking are free. If you don’t have $1,000 or if you would like to learn more about other savings options, check out our savings comparison chart.