Definition
Money set aside for unexpected costs such as a car repair, medical bill or job loss, kept somewhere easy to reach.
What it means
An emergency fund is savings you keep for surprises, so you do not have to use credit cards or payday loans when something goes wrong. The CFPB says there is no single right amount and suggests basing it on your own expenses; financial educators often mention three to six months of essential costs as a rule of thumb, and people with uneven income may want more. Many households start with a small goal, such as $500, and add a fixed amount from each paycheck. The money is usually kept in an insured savings or money market deposit account rather than invested, because it needs to be available quickly and not lose value. Automatic transfers on payday make saving easier. After using the fund, the usual step is to rebuild it.
Example
If essential monthly costs are $3,200, three months is $9,600. Saving $300 a month at 4% APY reaches that goal in a little over 2.5 years.
Illustrative numbers only. Your situation will differ.