Emergency Fund | Definition

/əˈmərjənsē fənd/

An emergency fund | spac | debt | loan | atm | definitionsis a large amount of money set aside, typically in a savings account, in case of any unexpected financial surprise. Those surprises can include a job loss, medical emergency, car repairs, etc. The purpose of having an emergency fund is to avoid borrowing money and going into debt.

Next word Scholarship | Definition ᐳ

Did You Know

Save at least 3-6 months' worth of essential expenses to protect yourself and your family from an unexpected emergency like loss of income.

Life can be unpredictable, and unexpected expenses can arise at any time. Whether it's a sudden medical emergency, car repairs, or job loss, having an emergency fund can provide a much-needed safety net to help you weather the storm.


What is an Emergency Fund? 


An emergency fund is a sum of money that you set aside specifically to cover unexpected expenses. It's designed to provide you with financial security and peace of mind, knowing that you have a cushion to fall back on in case of an emergency. 


The purpose of an emergency fund is to help you avoid going into debt when unexpected expenses arise. The fund can be used to cover a wide range of expenses, such as medical emergencies, car repairs, home repairs, or job loss.


emergency fund


Recommended Read: 10 Personal Finance Basics Everyone Should Know


How to Save for an Emergency Fund?


Building an emergency fund requires discipline, a focus on balancing long-term needs against short-term wants, and a willingness to save consistently over time. Below are four steps you can take to start building your emergency fund.


  1. Set a Goal: Determine how much money you'll need in your emergency fund. Experts recommend having 3-6 months' worth of living expenses saved.
  2. Make Saving Automatic: Set up an automatic transfer from your checking account to your savings account each month. Putting saving on auto-pilot takes away the sting of moving money from your checking account into your savings account and reduces the likelihood of forgetting to make transfers.
  3. Cut Expenses: Look for ways to reduce your expenses and redirect the savings toward your emergency fund. This might include canceling subscriptions, cooking at home more often, or cutting back on entertainment expenses.
  4. Consider a Side Hustle: Take on a side gig or freelance for a set period of time to earn extra income that is earmarked for your emergency fund.


Recommended Read: 3 Hacks to Help You Get Ahead on Any Budget


Potential Expenses That You Might Pay with an Emergency Fund


An emergency fund can be used to cover a wide range of unexpected expenses, including the following:


  • Medical Emergencies: Unexpected medical expenses can be costly, from emergency room visits to unexpected surgeries or treatments.
  • Car Repairs: Car breakdowns or accidents can be expensive to repair, making an emergency fund a valuable resource.
  • Job Loss: If you suddenly lose your job, an emergency fund can help you cover your expenses while you look for a new job.


saving for emergency fund


Recommended Read: 10 Tips to Prepare Your Finances for the Holidays


Three Expenses Unrelated to an “Emergency”


While an emergency fund is designed to cover unexpected expenses, there are some expenses that don't really fall into this category. For instance, below are three expenses that aren’t considered an “emergency.”


  1. Eating Out: While dining out with friends can be a fun social activity, it's not an unexpected expense and shouldn't be covered by your emergency fund.
  2. Shopping Sprees: Splurging on new clothes, gadgets, or other non-essential items is not an emergency expense and should be avoided if you're trying to save for your emergency fund.
  3. Vacations: While vacations can be a great way to relax and recharge, they're not an unexpected expense and shouldn't be paid for with your emergency fund. 


Recommended Read: Sinking Fund vs. Emergency Fund: How Do They Work?


The Money Wrap-Up


Building an emergency fund is an essential part of financial planning. By saving consistently and using the fund only for true emergencies, you can provide yourself and your family with much-needed safety. 


Remember to be disciplined and consistent in your savings efforts. With time and dedication, you can build a solid emergency fund that will provide you with financial security and peace of mind.

Download the CapWay App

Access more features to your Money Account

  • Money Goals
  • Request Money
  • Categorize Spending
  • Money Talk

The CapWay, Inc Debit Visa Card is issued by Metropolitan Commercial Bank (Member FDIC) pursuant to a license from Visa U.S.A. Inc. “Metropolitan Commercial Bank” and “Metropolitan” are registered trademarks of Metropolitan Commercial Bank ©2014.

1. For Money Account holders with a negative balance, the CapWay debit card will go into freeze until funds are deposited to bring account back to current. See terms and conditions

2. Sending or receiving money from other CapWay account holders will be instant. Transfers from other accounts could take up to 48 hours, depending on the financial institution.

3. Early access to funds requires direct deposit. Early payment is not guaranteed and is dependent on the timing of payer's submission of deposits. We generally post such deposits on the day they are received which may be up to 2 days earlier than the payer's scheduled payment date.

4. Money Goals allows account holders to save money towards financial goals created within the CapWay platform. Funds can be transferred from your Money Account or saved through the rounding up of your transactions from purchases.

5. CapWay offers financial content through Learn Money free of charge, but may include advertisements through affiliates. Phunds, CapWay's literacy program and session, is paid content or co-branded content.

© 2019-2023 CapWay Inc. All Rights Reserved.