Short Answer: How to Create an Emergency Fund
Setting aside money for unexpected expenses could help soften financial hits.
Editor's note: This article originally ran on Mar. 1, 2021.
Life can be unpredictable, which is why setting aside some money in an emergency fund is a good idea.
Emergency funds are short-term savings to help pay for unexpected life situations like a job loss, car or home repairs, and sudden illness or injury.
Morningstar’s director of personal finance, Christine Benz, suggests having three to six months of living expenses set aside. If you can cut costs in a pinch, like splitting rent between roommates or moving in with your parents, you might not need as large of an emergency fund.
Emergency funds need to be very accessible. You should consider placing your cash into a savings account.
If you have additional savings, try putting that money to work in a tax-friendly retirement account like an IRA and invest in a diversified stock fund.
Setbacks happen to us all, but an emergency fund can help mitigate the impact and get back on your feet.