An emergency fund is money set aside specifically for unplanned expenses or financial emergencies, such as a loss of income, an unexpected medical bill, a necessary car repair, or an urgent home repair. Having savings available may reduce the need to rely on credit or other borrowing when unexpected expenses occur.
Building emergency savings is a common financial-planning priority because unexpected expenses can otherwise require borrowing or disrupt other financial goals. Priorities depend on individual circumstances.
How Much Do You Actually Need?
A commonly cited guideline is to work toward several months of essential expenses, but the appropriate amount depends on your income stability, household expenses, insurance coverage, dependents and other circumstances.
Start by calculating your monthly essential expenses:
- •Housing — rent or mortgage, plus utilities
- •Food — groceries (not dining out)
- •Transportation — car payment, insurance, fuel, or transit costs
- •Insurance — health, auto, renters
- •Minimum debt payments — student loans, credit cards
Use your essential monthly expenses to estimate a target that fits your circumstances. Some people may choose to work gradually toward several months of essential expenses.
If a larger target feels difficult, start with an amount that is realistic for your budget. Even a relatively small emergency fund can provide some financial protection, and you can build it gradually over time.
Where to Keep Your Emergency Fund
An emergency fund generally should be kept somewhere safe and reasonably accessible, separate from routine spending when practical, and low risk.
A savings account or other appropriate deposit account can be one option. If considering a bank deposit account, verify applicable deposit-insurance coverage and account terms.
Some savings accounts offer higher yields than others. Compare current APY, fees, minimum-balance requirements, withdrawal or transfer options, access times and applicable deposit-insurance coverage before choosing an account.
The Step-by-Step Plan
Step 1: Open a dedicated savings account
Consider keeping emergency savings separate from money used for routine spending. A separate savings account can make the fund easier to track and may reduce the temptation to spend it for non-emergencies.
Step 2: Calculate your target
Choose an initial savings goal that is realistic for your budget. After reaching it, consider gradually increasing the fund based on your essential expenses and financial situation.
Step 3: Automate your contributions
Set up an automatic transfer from your checking account to your emergency fund on the same day you get paid. Even relatively small recurring contributions can accumulate over time. Choose a transfer amount that fits your budget and cash-flow needs. Automating removes the willpower required and makes saving the default behavior.
Step 4: Find the money to save
Review discretionary spending to see whether there are expenses you can reduce temporarily. The amount available to save will vary by household.
Step 5: Use it only for real emergencies
Each household should define in advance what qualifies as an emergency. Examples may include:
- •Loss of income
- •Unexpected medical expenses
- •Necessary vehicle repairs
- •Urgent home repairs
- •Unexpected essential travel
Predictable recurring expenses can generally be planned for separately.
Common Mistakes
- •Not comparing savings options — APYs, fees, access and account terms can vary significantly.
- •Investing it — Investments such as stocks can fluctuate in value, which may make them unsuitable for money that could be needed on short notice.
- •Dipping into it for non-emergencies — If you use your emergency fund for a vacation or a splurge, replenish it before doing anything else.