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By Julia Glum
May 11, 2020
Jade Schulz for Money

As the coronavirus crisis takes the unemployment rate to Great Depression-era levels, Americans are losing financial stability fast — and emergency funds are having a moment.

Emergency funds, or savings set aside to help people get through unexpected disasters, are crucial even in the best of times. According to a 2019 survey, four out of 10 people don’t have enough cash on hand to cover a surprise $400 expense. The outbreak is simply highlighting the importance of creating one.

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But how do you actually figure out how big your emergency fund should be? And once you’ve calculated that, what do you do with it?

Here’s everything you need to know.

What is an emergency fund?

Amy Richardson, a certified financial planner with Schwab Intelligent Portfolios, says an emergency fund “puts you in control of life’s unexpected twists and turns, whether you’re going through a global pandemic or other crisis.” It’s basically a safeguard against a future panic attack.

“By having an emergency savings [fund], your finances will be one less thing to stress about during an already uncertain time,” she adds.

How much should you put in your emergency fund?

Recommendations range from three months of expenses to six months of expenses to half your salary — a big range.

The reason the estimates vary so widely is that each person’s situation is different. Richardson said if you’re in a single-income household or self-employed, you probably want to sock away six months of fixed expenses. If you’re part of a double-income household and not concerned about losing a job at the moment, three months is fine.

(The Bureau of Labor Statistics says the average duration of unemployment right now is just over 17 weeks, or about four and a half months.)

Now, about those fixed expenses. Richardson said that she’s basically referring to any crucial bill — think rent, groceries, health care, utilities and loans. Haircuts, gel manicures and Chipotle orders don’t count because those are things “you would cut from your budget in the event of a job loss or another major disturbance,” she adds.

Where should you keep your emergency fund?

Once you’ve determined how large the fund should be and you’ve scraped together the cash, you’ve got to figure out where to stash it. Fred Egler, a CFP with robo-advisor Betterment, says to keep emergency savings in a different place than your regular spending money.

“You don’t want it to be jumbled together with your checking account or retirement savings or saving for your kids’ education,” he says. “Make sure it’s separate so you’re not double dipping or intermingling.”

A high-yield savings account, money-market fund or CD might be a good option so you can earn interest on the funds. You want the emergency savings somewhere you can access them fast when the time comes.

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According to Egler, you’ll know it’s time to tap into my fund when things take a turn for the worse. It’s a break-glass-in-case-of-emergency situation.

“If the sirens and alarms are going off in your head and [you think] ‘I don’t have many other options; I’m kind of stuck here,’ it might be time,” he says. “It’s your money. You’ve saved it, and you have the ability to use it. Be judicious and know when to pull that money out when you’re in trouble.”

Bottom line: Your emergency fund should contain between three and six months of non-discretionary spending. You should put it in a separate account it can work for you and only touch it if you feel your position is truly dire.

If you’ve done all of that and you’re still feeling extra uneasy because of the pandemic, Egler says to consider having a bit more cash on hand.

“Keeping more money in your checking account right now might be a good strategy because of that uncertainty,” he adds. “It might make a little more sense to keep more than a month, maybe two months, [there] so you can cover expenses that come up — and provide you with peace of mind.”

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