Building an emergency fund

A car repair, a broken water heater or a gap between jobs can come at any time. An emergency fund is a cash reserve set aside for unplanned expenses and financial emergencies, such as car repairs, home repairs, medical bills and a loss of income. Even a small amount gives you some financial security.

Sizing it from your own history

There's no single dollar target, because the amount you need depends on your situation. One way to estimate it is to list the unexpected expenses you've had before and what they cost. A year of bank and card statements shows them, including the repair bills, the vet visit and the appliance that quit.

A house adds its own surprises. Your home records, from repair invoices to the age of the water heater and the roof, show which large costs could come up.

Adding to it steadily

• A specific goal. Having one can help you stay motivated.
• A system. Set up a way to make consistent contributions and track your progress.
• Automatic transfers. Recurring transfers are often one of the easiest ways to save. Leave enough in checking to avoid overdraft fees.
• A tax refund. For many people, a refund is one of the largest checks of the year, and all or part of it can go into the fund.
• One-time money. Gifts and other windfalls can go in too, all or a portion of them.

Where it can be kept

The fund should be safe, easy to reach and out of reach of everyday spending. A dedicated bank or credit union account for the fund keeps it apart from your spending money. Prepaid cards and cash are other options, though cash can be stolen, lost or destroyed.

Using it

Set your own rules for what counts as an emergency or an unplanned expense. Using the fund can help you avoid the interest and fees of credit cards or loans. Use it when you need it, and rebuild it afterward.

An annotated example

What to do next

List the unexpected expenses from the past year and what each cost. Set up a recurring transfer that leaves enough in checking for the month's bills. Write down what counts as an emergency for the fund, and keep the note with your budget.