Why should I open an emergency savings account?

Save, Invest, Give

In this episode, Adam Nash answers why opening an emergency savings account is important and how much you should put into it. Since 2017, Adam Nash has taught “Personal Finance for Engineers” at Stanford. He's covered topics from compensation, investing, to real estate. He’s the Former President and CEO of Wealthfront, Former Vice President of Product & Growth of Dropbox, and on the Board of Directors at Acorns. He’s currently the CEO and co-founder of Daffy, a not-for-profit community built around a new, modern platform for giving.

One of the biggest financial mistakes that people make is not setting up an emergency fund.

What is an emergency fund? It's a separate account from your normal checking or savings account where you put money aside in case of an emergency, either a large expense or some disruption to your primary income like losing a job.

Having an emergency fund is incredibly important because many of our financial commitments and financial goals are long-term commitments and goals, and you don't want a short-term disruption of income or a large expense to get in the way of you hitting those goals.

So how much money do you need in an emergency fund? Well, it turns out that the most likely reason that you would need an emergency fund is by losing access to your primary income or losing your job.

And in the U.S., it takes about three to six months on average for you to find another job that pays the same as a job that you've lost.

So the best way to think about your emergency fund is putting aside at least three months of your living expenses so that if you lost your job and couldn't replace your income right away, you could still make your rent and all the other expenses that you need to maintain your household.

Thanks for watching.

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Please note that the information contained on this page is for educational purposes only and should not be considered tax advice. Any calculations are intended to be illustrative and do not reflect all of the potential complexities of individual tax returns. To assess your specific tax situation, please consult with a tax professional.

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