What is an emergency fund?
An emergency fund is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly.
Here are some of the top emergencies people face:
- Job loss.
- Medical or dental emergency.
- Unexpected home repairs.
- Car troubles.
- Unplanned travel expenses.
What's the right emergency fund amount?
Your emergency fund will help protect you from 2 different types of financial emergencies: spending shocks and income shocks.
Spending shocks—like a broken windshield or a root canal—are unplanned, unwanted expenses. To prepare yourself for potential spending shocks, aim to save half a month's worth of living expenses or $2,000—whichever is greater.
Income shocks are the unplanned loss of income, like losing a job. Income shocks tend to be more expensive and last longer than spending shocks. They also tend to happen less frequently. To prepare for income shocks, many experts suggest keeping enough money in your emergency fund to cover 3 to 6 months' worth of living expenses.
So if you spend $5,000 per month, your first emergency fund savings milestone should be $2,500 to cover spending shocks. For your longer-term goal of an emergency fund that will cover income shocks, aim to save $15,000 to $30,000 total.
Where to put your emergency fund
Since spending shocks can occur at any time, Vanguard recommends you keep the portion of your emergency savings to cover spending shocks easily accessible, either in cash or cash equivalents. While you can keep this money in a traditional savings account through a bank or credit union, cash investments can be a low-risk alternative with the potential to earn more interest than you would in a bank account.
At Vanguard, we offer several cash investments where you can keep your emergency fund. Check out the options below to see if cash investments are right for you.
The portion of your emergency savings set aside for income shocks is both larger in amount and will likely be needed less frequently. Because of this, you might be better off investing this money in a taxable brokerage account, where it can have the potential to grow, or in a Roth IRA, where you can withdraw your contributions penalty-free and income tax-free.2 These accounts don't offer the same safety and accessibility as savings accounts and cash investments, but they can still be useful in helping you sustain shocks to your income—and any returns you earn can be used to help fund other goals.
Benefits of having an emergency fund
Aside from financial stability, there are other pros to having an emergency reserve of cash.
1Bank Sweep program balances are held at one or more participating banks, earn a variable rate of interest, and are not covered by SIPC. See the list of participating Program Banks (PDF). Balances are eligible for FDIC insurance subject to applicable limits.
2Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).
For more information about Vanguard mutual funds, obtain a mutual fund prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
All investing is subject to risk, including the possible loss of the money you invest. There may be other material differences between products that must be considered prior to investing.
The Vanguard Cash Plus Account is a brokerage account offered by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation, member FINRA and SIPC. Under the Sweep Program, Eligible Balances swept to Program Banks are not securities: They are not covered by SIPC but are eligible for FDIC insurance, subject to applicable limits. Money market funds held in the account are not guaranteed or insured by the FDIC but are securities eligible for SIPC coverage. See the Vanguard Bank Sweep Products Terms of Use (PDF) and Program Bank list (PDF) for more information.