According to a 2018 report from the Federal Reserve, 40 percent of U.S. adults would not be able to cover an unexpected expense of $400 without scrounging up the cash by, say, borrowing from friends or family or selling something.
This is where an emergency fund can help. A stash of cash can come to your rescue not only if you lose your job, but also if you have an unexpected medical bill or an urgent home or car repair.
Financial planners usually recommend setting aside from three to six months' worth of essential living expenses, including rent or mortgage payments, health insurance, transportation and groceries. If you have a stable job, are debt-free and could move in with friends or back home in a pinch, you might be comfortable saving less.
A spouse or partner's income is another safety net. If you have children, a mortgage or lots of debt, or you earn an irregular income as a freelancer or small-business owner, you should lock down enough capital to last six months or more.
Of course, this may mean that your emergency fund should have thousands of dollars, and that is tough for many people to achieve. But you don't need to stockpile that amount all at once, especially if you are simultaneously paying down loans or beefing up your 401(k).
Pam Capalad, a certified financial planner in New York and founder of Brunch & Budget, recommends focusing on a smaller amount, such as one month's worth of living expenses. After that, work on debt while gradually contributing to your emergency fund.
If you're feeling really stretched, keep at least $1,000 in your emergency fund at all times to bail you out of minor crises, so you don't need to add more to your credit card.
The easiest place to keep your emergency fund is in an FDIC-insured high-yield savings or money market deposit account. Ally Bank and Discover Bank both offer savings accounts that recently paid 2 percent or more and have no monthly fees or minimum-balance requirements.
"Save for a feeling, not for a thing," says Capalad. "Having this fund means that if something unexpected comes up, you can grieve or be emotional without stressing about the financial side or feeling stuck."
If it helps, rename your emergency fund something more positive, such as a "Yes Fund" or an "Opportunity Fund," says Capalad. "It gives you the ability to say 'Yes, I can buy new tires for my car,' or 'Yes, I can take advantage of this once-in-a-lifetime opportunity.'"
Miriam Cross is an associate editor at Kiplinger's Personal Finance magazine. Send your questions and comments to email@example.com.