An emergency fund is very handy when unplanned and unexpected expenses arise. It is always advisable to have some money tucked away for a rainy day, as an emergency fund can supplement any temporarily foregone income or can be used for an infrequent/unexpected purchase. Usually, financial experts advise that an emergency fund should be able to cover three to six months of living expenses. Emergency funds should not be invested in risky places like the stock market, and should instead be focused on high quality liquid fixed income securities or money market investments. The purpose of an emergency fund is to have money in case of an unplanned event such as a layoff or unforeseen medical expenses. The volatility of the stock market makes it a very risky option and also makes it impossible to guarantee that you will have sufficient funds if there is an emergency.

Emergency funds serve as a safety net where one can afford to pay for living necessities that cannot be obtained through current income sources. It is advisable to place emergency funds in a fairly liquid interest earning investment option. In other words, in the case of an emergency, you should be able to access the fund quickly and inexpensively. This means that you want to pick investment options that do not charge high fees or have inexpensive "early withdrawal" fees. This rules out long-term investment options (because of the time period) or mutual funds (because of the fees and risk involved). The most popular options for emergency funds are savings accounts and short-term certificates of deposit.

For tips on how to build an emergency fund please read Build Yourself An Emergency Fund.

This question was answered by Chizoba Morah.

  1. Can mutual funds outperform savings accounts?

    A mutual fund can – and should – outperform a savings account. In most cases, it should not even be a close race. Savings ... Read Full Answer >>
  2. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  3. How soon should I start saving for retirement?

    The best answer to the question, "How soon should I start saving for retirement?", is probably, "yesterday," and the second ... Read Full Answer >>
  4. Can I use my 401(k) as a collateral for a loan?

    Although federal Internal Revenue Service, or IRS, regulations prohibit using a 401(k) account as collateral for a loan, ... Read Full Answer >>
  5. How does the trust maker transfer funds into a revocable trust?

    Once a revocable trust is created, a trust maker transfers funds or property into the trust by including them in a list with ... Read Full Answer >>
  6. Why do economists think it is important to track discretionary income?

    Economists track discretionary, and disposable, income as a proxy for the growth in the financial health of average citizens ... Read Full Answer >>
Related Articles
  1. Financial Advisors

    Paying for College: Top Ways to Budget and Save

    Saving for your kids' college education can be complex and expensive. Here are some popular vehicles that help perpetuate college funds.
  2. Retirement

    Suddenly Pushed into Retirement, How to Handle the Transition

    Adjusting to retirement can be challenging, but when it happens unexpectedly it can be downright difficult. Thankfully there are ways to successfully transition.
  3. Budgeting

    Preventing Medical Bankruptcy

    If you’re worried medical expenses could overwhelm you, there are some thing you can do to ease your concerns.
  4. Savings

    How Parents Can Help Adult Children Buy a Home

    Owning a home isn't easy thanks to stringent lending standards. Thankfully, there's ways parents can help their kids buy a home.
  5. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  6. Retirement

    4 Ways to Boost the Amount You Save for Retirement

    Retirement can easily last more than twenty years, which means you have to save a lot. Thankfully, there are ways to enhance the amount you put away.
  7. Credit & Loans

    Adjustable Rate Mortgage: What Happens When Interest Rates Go Up

    Adjustable rate mortgages can save borrowers money, but they can't go into it blind. In order to benefit from an ARM, you have to understand how it works.
  8. Taxes

    10 Money-Saving Year-End Tax Tips

    Getting organized well before the deadline will curb your frustration and your tax liability.
  9. Retirement

    How to Stretch Your Retirement Savings

    What does "nest egg" mean for your personal situation? Will you deplete it, or will you nurture it to generate income that lasts throughout retirement?
  10. Savings

    Paycheck to Paycheck? Start Saving This Way

    The steps are simple; the execution not so much. But if you take some action toward your goal every single day, you'll see tangible results pretty swiftly.
  1. Personal Finance

    All financial decisions and activities of an individual or household, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, ...
  3. Linked Transfer Account

    Accounts held by an individual at a financial institution that ...
  4. Equitable Division

    A legal theory that guides how property acquired during the course ...
  5. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all ...
  6. Foreign remittance

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center