Here’s Why You Need an Emergency Fund

What Is an Emergency Fund?

An emergency fund is a store of cash savings earmarked for unexpected costs. You likely already have a checking account and possibly also savings accounts for specific goals, like a down payment or college savings for your child. An emergency fund is a separate account just for unanticipated expenses.

The goal of having an emergency fund is not only to be able to cover these costs when necessary, but to avoid going into debt. If you were to pay for a car repair with a credit card, for example, you might spend additional money on interest charges over time and could see a negative impact on your credit score as your debt increases.

Why You Need an Emergency Fund

You need an emergency fund because covering expenses you didn't plan for is a fact of life. While it's tempting and even wise to make a detailed budget and have a plan for each dollar you earn, it's inevitable that you'll have to pay bills you didn't anticipate (which experts sometimes refer to as "spending shocks"). These can include:

• Sudden and urgent home repairs, like fixing your roof or water heater
• Emergency medical or dental procedures for you, your family members or pets
• Car repairs
• Income loss due to layoff or other job changes
• A time-sensitive move to a new home
• Appliance or technology replacement
• Urgent travel to visit a sick relative or attend a funeral
• Unexpectedly high utility bills
• Traffic tickets and other fines

Learn more: What Is an Emergency Fund Used For?

How Much Money Should I Have in My Emergency Fund?

A good starting point is to aim to have a minimum of $500 to $1,000 saved for emergencies. That can give you a foundation of financial security while you slowly work on saving more.

Most commonly, experts recommend saving three to six months' worth of your basic monthly expenses in an emergency fund. With that much set aside, you'll be able to weather a big income setback like a layoff without falling behind on your bills.

Tip: If saving three to six months of expenses seems unrealistic with your budget, start with a smaller savings goal. Even saving just $50 a month will give you an emergency fund of $600 in a year.

If you have additional support, like a spouse or other family members with secure jobs and substantial savings, you may be able to save less. However, it is possible to have an emergency fund that's too big and prevents you from taking advantage of investment earnings or meeting other savings goals.

But in many cases, it makes sense to save more than experts typically recommend. Maybe you're the primary wage earner in your household, you have kids to support, your income fluctuates or you have substantial monthly debt payments. Saving more than six months' worth of expenses could ensure you have enough runway if you lose your job and it takes longer than expected to find a new one.

Once you decide how many months' worth of savings you need to feel secure, you can calculate the size of your ideal emergency fund.

Example: Let's say you spend an average of $4,000 a month on bare-bones necessities, like your mortgage payment, groceries, utilities, gas and minimum monthly debt payments. You're a full-time salaried worker with a working spouse and one child, and you decide to keep three months of expenses saved. You'd work toward an emergency fund of at least $12,000.

Where Should I Put My Emergency Fund?

Your emergency fund should be immediately accessible, in a savings account that you can withdraw from just as easily as your checking account. Ideally, open a high-yield savings account for this purpose so that you earn as much interest as possible while still allowing for maximum accessibility. Your emergency fund shouldn't be locked up in an investment account or certificate of deposit (CD), which could charge penalties for certain withdrawals and require you to wait weeks to get your money.

How to Build an Emergency Fund

To build an emergency fund, follow these steps:

1. Start with an initial deposit. To kick-start your savings, open a high-yield savings account and make either the required minimum deposit, if necessary, or transfer an amount you can afford. It may be $10, $50 or $100. Anything at all is a step in the right direction.
2. Evaluate your budget. If you're not sure how much money is available to set aside for your emergency fund on an ongoing basis, review your income and expenses and create a simplified budget. Building an emergency fund is a high priority, but it shouldn't prevent you from paying bills, including minimum debt payments, in the meantime.
3. Set up an automatic transfer. Next, transfer money monthly from your checking account to your emergency fund. You may decide to set an aggressive initial goal until you hit $500 or $1,000 saved, then slow down. For example, say you used $200 from your tax refund to make an initial deposit in your emergency fund. You may decide to save $75 a month for four months to get to $500 saved, then save $50 a month thereafter.
4. Add extra when you can. Consider your emergency fund as a first stop anytime you get a windfall, tax refund, work bonus or financial gift. Once you have a baseline amount saved in your emergency fund, you don't need to put all your extra money toward it. But allocating a portion of any income boost to it will help you reach your goal.
5. Replenish when necessary. Unexpected bills come up regularly. It's common to have to reach into your emergency fund while you're in the process of building it. Do your best to fill your emergency fund back up after making a withdrawal. Don't lose heart; keep transferring money, adding extra when possible, and know your fund is doing its job.

The Bottom Line

Financial advice is rarely one-size-fits-all, but in the case of the emergency fund, everyone needs one. The amount in your fund is what will change based on your circumstances. If hitting your ultimate savings goal seems out of reach, break it up into manageable chunks. Celebrate every time you save another $200 or $500, and know that an emergency fund is fluid. Your balance will grow and contract as you save more and spend more, but your peace of mind—knowing you have a solid foundation—will remain.