Unexpected expenses and changes to income can arise throughout a person's lifetime. You can prepare for emergencies by creating a savings plan and making sure you're storing your savings in the best possible way.
Personal finance
Emergency fund: Why you need one
An emergency fund can help you deal with life's unexpected events. Learn how much you should save and where to keep your emergency savings.
Personal finance
Building an emergency fund
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Cash investments
Cash Plus Account
Mutual funds
Senior Manager, Investment Product Strategy, Vanguard
Head of Investment Product Strategy and Enablement, Vanguard
What's an emergency fund?
An emergency fund is an amount of money set aside to cover the financial surprises life might throw your way. These unexpected events can be stressful and costly.
Here are some of the most common financial emergencies people face:
- Job loss.
- Medical or dental expenses.
- Unexpected home repairs.
- Car troubles.
- Unplanned travel expenses.
What's the right emergency fund amount?
A common rule of thumb suggests that to be conservative, people should have 3 to 6 months' worth of expenses set aside for emergency financial needs—notably unexpected expenses or changes to income.
There are two main reasons to tap into your emergency funds: spending shocks and income shocks.
Spending shocks. Spending shocks are relatively common unanticipated expenses. They can include costs such as unforeseen health care needs, home repairs, or other unplanned costs. To prepare yourself for potential spending shocks, experts suggest it's best to aim to save half a month's worth of living expenses or $2,000—whichever is greater.
Income shocks. Income shocks may arise less frequently than spending shocks and are instances such as unexpected job loss or a notable decline in income. 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.
A range of other factors could influence how much you need to allocate toward your emergency fund. To better assess your personal financial situation, use the following table to determine if you might need to save more or less than what most experts recommend.
Many factors can affect savings needs
| Factor | More savings needed | Less savings needed |
| Income | Single | Dual |
| Dependents | Yes | No |
| Income variability | More | Less |
| Spending flexibility | Less | More |
| Job security | Less | More |
| Job skills | Highly specialized | Generalized |
| Insurance | Less | More |
| Alternative financing | Low borrowing ability | Alternatives available |
| Portfolio composition | Exposed to market risks | Cash |
Source: Vanguard
Where to put your emergency fund
Since spending shocks can occur at any time, investments that offer safety and liquidity are most appropriate for emergency savings. These can be checking and savings accounts, money market funds, or cash management accounts, such as the Vanguard Cash Plus Account.
When deciding how to allocate your savings, Vanguard recommends you consider the following:
Ease of account use
A checking or savings account features an account and routing number which you can use for everyday spending needs and recurring payments, in addition to easy access to your money to meet emergency financial needs. Checking and savings accounts also offer Federal Deposit Insurance Corporation (FDIC) insurance, protecting you against a loss of account balances if those institutions were to fail financially.
Conversely, money market funds are typically held within a brokerage account and represent a type of mutual fund that invests in extremely short-term, highly liquid securities. Money market funds held within a brokerage account may be eligible for Securities Investor Protection Corporation (SIPC) coverage. Similar to FDIC insurance, SIPC coverage protects brokerage accounts if the firms were to fail financially.
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Yield or return
Although checking and savings accounts and money market funds represent some of the safest and most liquid options, these choices vary in terms of the yields or returns they offer on your savings. For example, in most cases, money market funds offer a higher yield than checking accounts offer. But overall, when you allocate savings to cash, you choose to trade the potential investment return of a balanced portfolio for the security of better preserving your principal amount. That's why choosing a competitive yield that can help increase the value of your cash portfolio is a critical consideration in addition to safety.
What options does Vanguard offer for emergency savings?
Vanguard recently introduced the Cash Plus Account as our savings account alternative that can help support investors in achieving their emergency savings goals.
The Cash Plus Account provides access to:
- A competitive annual percentage yield (APY) of 3.65%—notably higher than the 0.42% average savings account interest rate.1
- Familiar bank account features such as an account number and routing number.2
- Up to 5x the FDIC insurance you can get from a single bank.3
The Vanguard Cash Plus program APY (annual percentage yield) is 3.65% as of January 6, 2025. The APY will vary and may change at any time. Source for average bank savings yield of 0.42%: FDIC National Rates and Rate Caps as of December 16, 2024.
Many of our clients use the Cash Plus Account not only for emergency savings, but also for daily cash needs. For instance, the Cash Plus Account can work with payment apps such as Venmo or PayPal for everyday use.2 In addition, the Cash Plus Account provides the option to invest in money market funds, including municipal money market funds for investors in higher tax brackets who could benefit from tax-free income on their savings. Ultimately, the Cash Plus Account allows Vanguard investors to pursue their holistic financial goals, both for the short and long term, in one place.
Learn more about your savings options
Benefits of having an emergency fund
Aside from financial stability, there are other pros to having an emergency reserve of cash.
It can prevent you from making bad financial decisions
There may be other ways you can quickly access cash, like borrowing, but at what cost? Well, there are interest charges, fees, and penalties—to name a few. Ultimately, a primary benefit of achieving an emergency savings goal is avoiding expensive financing for unplanned costs, such as the use of credit card debt or other high-interest options.
It can help reduce stress
It's no surprise that when life presents an emergency that threatens your financial well-being, it causes stress. Going through life without a safety net is living on the financial edge, hoping to get by without running into a crisis.
Being prepared with an emergency fund gives you the confidence to tackle unexpected events without adding money worries to your list.
It can keep you from spending on a whim
You've heard the saying "out of sight, out of mind." That's the best way to store your emergency money. By putting it in a separate account, you'll know exactly how much you have—and how much you may still need to save. And you'll be less inclined to tap into it before the need arises.
Avoid these 5 ways to pay for emergencies.
How to build an emergency fund in 6 steps
How can you get started on building an emergency fund? Let's chart the course.
Ready to get started? Start your emergency fund
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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.
1The Vanguard Cash Plus program APY (annual percentage yield) is 3.65% as of January 6, 2025. The APY will vary and may change at any time. Source for average bank savings yield of 0.42%: FDIC National Rates and Rate Caps as of December 16, 2024.
2Some third-party institutions may not accept the Cash Plus Account routing number for transactions. If you have any issues using the routing number on a third-party website, contact the provider.
3Bank Sweep program balances are held at one or more Program Banks and are not cash balances held by Vanguard Brokerage Services (VBS), earn a variable rate of interest, and are not securities covered by SIPC. Bank Sweep deposits are covered by FDIC insurance up to $250,000 per insurable category of ownership at each Program Bank when aggregated with all other deposits held by you at such bank and in the same insurable category. VBS will aggregate and allocate Bank Sweep deposits to Program Banks across Vanguard Cash Plus and Vanguard Cash Deposit with identically registered accounts to offer maximum FDIC coverage up to $1.25 million for individual and trust accounts and $2.5 million for joint accounts when at least 5 Program Banks are utilized. VBS will aggregate and allocate Bank Sweep deposits for trust accounts at the account level and not at the beneficiary level. FDIC coverage may be decreased based on Program Bank limits and whether you've opted out of any Program Banks and is subject to applicable FDIC coverage limits. You are solely responsible for monitoring the aggregate amount that you have on deposit at each Program Bank in connection with FDIC limits, including through other accounts at VBS. See the Vanguard Bank Sweep Products Terms of Use (PDF) and list of participating Program Banks (PDF) for more information. For more information about FDIC insurance coverage, please visit fdic.gov.
All investing is subject to risk, including the possible loss of the money you invest. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.
Savings accounts may have characteristics that differentiate them from bank sweep programs offered by Vanguard Cash Plus. For example, they may offer overdraft protection, ATM access (immediate access to your money), and other convenience features. Each company's products differ, so it's important to ask questions to understand account features.
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.
Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Vanguard funds not held in a brokerage account are held by The Vanguard Group, Inc., and are not protected by SIPC. Brokerage assets are held by Vanguard Brokerage Services, a division of Vanguard Marketing Corporation, member FINRA and SIPC.
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