Emergency Fund

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DEFINITION of 'Emergency Fund'

An account that is used to set aside funds to be used in an emergency, such as the loss of a job, an illness or a major expense. The purpose of the fund is to improve financial security by creating a safety net of funds that can be used to meet emergency expenses as well as reduce the need to use high interest debt, such as credit cards, as a last resort.

BREAKING DOWN 'Emergency Fund'

Most financial planners suggest that an emergency fund contain enough money to cover at least three months of living expenses. Note that financial institutions do not carry accounts labeled as emergency funds; it is up to the individual to set up this type of account.

Most emergency funds are highly liquid, such as checking or savings accounts. This allows quick access to funds, which is vital in emergency situations.

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