Unfortunately, it is almost a given that at some point we will face an unexpected expense that is larger than what we would’ve liked. An emergency fund is a foundational step that can prevent you from having to turn to debt or retirement assets when times get tough. It is what turns a potential financial catastrophe into a mere inconvenience. We’re providing answers to some common questions to help you ensure you’re prepared:

How much money do I need? The ideal amount for your emergency fund depends on your financial situation and lifestyle. For example, if you own a home and/or provide for dependents, you’d likely need to have more set aside than someone with less expenses. Ideally, 3-6 months of expenses is what you should have saved. The goal is to ensure you can keep your expenses afloat in the event your emergency involves the loss of your income. The best way to determine what 3-6 months of expenses equates to is by maintaining and reviewing a monthly budget.

How do I come up with the cash quickly? If saving 3-6 months of expenses seems to be an unreasonable goal due to debt or a cash flow shortage, don’t despair. Start with a more modest target, such as saving $1,000 as quickly as you can. Consider setting up an automatic monthly transfer to a savings account to make self-discipline a matter of course. Selling items you don’t need and cutting back or reducing non-essential expenses can help you acquire the cash.

What types of expenses are considered an emergency? Emergencies are unforeseen issues that impact your finances and cannot be avoided or delayed. Examples include:

• A repair to your home or vehicle that is necessary for appropriate function and safety
• A repair or replacement of a home appliance or system (i.e. air conditioning/oven/furnace)
• An out-of-pocket medical expense for an illness, injury, or other unforeseen necessary care
• An unexpected reduction or loss of income

Anything foreseeable or discretionary is generally not an emergency; examples of non-emergencies include things like a vacation, home remodel for cosmetic reasons, or holiday expenditures. Once you see your savings begin to build, you may be tempted to use the account for something other than an emergency. Budget separately for bigger expenses that are discretionary or foreseeable and keep your emergency money for unforeseen situations.

Where do I put it? An emergency fund should be easily accessible for when you need it, which is why many people choose traditional bank savings accounts. Relying on your retirement plan for hardships or loans is not an appropriate emergency strategy due to the fees, penalties, and lost market potential that may occur when removing money from a retirement plan prematurely.