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An emergency fund is an account you can tap when unexpected expenses arise or you lose your income. Not only is it a resource for avoiding debt and maintaining financial security in a crisis, but it can also reduce financial stress to know that you're covered in an emergency.
A Bipartisan Policy Center survey found that there's widespread financial insecurity and inadequate savings among American workers. According to the survey, 1 in 3 workers could only cover bills for one month or less if they suddenly lost their income. In addition, 45% couldn't pay for a $400 emergency expense using savings.
Without money saved for unanticipated expenses, it can feel like you're living close to the edge. Here are six reasons why you need an emergency fund, plus steps you can take to build your fund faster.
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1. Job Loss
One key purpose of a flush emergency fund is to make it through a dip in income without doing long-lasting damage to your finances or going into debt. For example, your emergency savings can help you cover your necessary expenses for a few months while you find a new job.
When considering how long your emergency fund should be able to cover you in the event of a loss of income, start by calculating your basic expenses. You only need to include non-negotiables—housing, basic groceries and child care, for instance. Things like gym memberships and streaming services wouldn't make the cut.
You can multiply your monthly bare-bones expenses by the number of months' worth of expenses you want to keep socked away in your fund. Three months is a good place to start, but you could aim for six months or more for added peace of mind. People with an irregular income or those who are the primary earners in their household may want to aim to have enough in savings to cover a year's worth of expenses.
2. Unforeseen Medical Expenses
An emergency fund can help you afford an unexpected medical emergency. Even if you have health insurance, your coverage may not cover all of the costs of a medical treatment you need. For example, you could end up on the hook for expenses such as X-rays or transportation in an ambulance.
Be sure you have ample cash reserves set aside to cover expenses up to your insurance deductible. In addition, dental visits or emergency dental work may require you to pay out of pocket.
3. Unexpected Home Repairs
Tapping into your emergency fund can help you cover urgent home repairs, such as a broken home appliance, a damaged roof, a failed heating system or a burst pipe. These types of time-sensitive expenses can lead to a stressful situation without adequate cash on hand to cover them. Homeowners might consider earmarking funds in their emergency savings specifically for managing these costs
4. Car Maintenance and Repairs
If your car breaks down or if you get into an accident, the unexpected car repairs can get expensive fast. Routine maintenance costs can also sneak up on you if you don't plan ahead. For example, you might take your car in for an inspection and learn you have to replace all four tires.
Budget for these expenses to ensure you can afford to keep your car on the road, and keep in mind that if you drive an older car, you may want to earmark more funds for the specific purpose of vehicle maintenance. You can also consider paying for insurance with a lower deductible or opting for comprehensive coverage to lower your liability.
5. Urgent Pet Care
If your furry friend has a medical emergency and needs expensive pet care, finding funds to cover vet visits, treatments or surgeries can be taxing, even if you have pet insurance.
How you'll foot the bill will likely be the last thing you want to have to think about when your pet is sick or injured, but the bill could be thousands of dollars. Tapping into your emergency fund can help you make it through an already emotionally challenging time without compounding the stress.
6. Family Emergencies
When a loved one is seriously ill or is expected to pass on soon, you won't usually have the time or flexibility to pick the cheapest flight dates or find a discounted hotel stay. When you need to get there now, those expenses quickly add up. And so do other costs you may contribute to in a crisis, such as health care or end-of-life expenses.
If your employer doesn't offer bereavement pay, you may experience a dip in your income at the same time as this spike in expenses. This makes having an emergency fund to dip into even more vital. No one can adequately prepare for the emotions that come with losing a family member, but you can plan ahead and save money to remove financial stress from the picture and focus on coming together with your loved ones.
How to Build an Emergency Fund
Follow these steps to build an emergency fund from scratch or bolster your current savings account more quickly.
- Calculate a savings goal. Experts suggest saving three to six months of basic expenses, but you might save more money if you're supporting dependents or have unstable income. If money is tight, you could start with a smaller goal, such as two weeks' worth of take-home pay.
- Create a savings schedule. With a goal in mind, come up with a reasonable plan to get there. For example, you might transfer 10% of each paycheck into your emergency fund if you can afford to do so while keeping other goals, such as saving for retirement, intact.
- Automate savings. Create a consistent habit and reach your goal by automatically transferring a portion of each paycheck into a high-yield savings account.
- Find extra funds. Consider canceling subscriptions, picking up a side hustle or funneling tax returns and other windfalls into savings to build your emergency fund faster.
The Bottom Line
Knowing that you have adequate money to cover yourself in a crisis can help you feel more at ease. While you can't predict when an unexpected expense or another challenge will take a swing at your budget, you can prepare to recover from these blows by setting aside funds specifically for unanticipated expenses or a loss of income.
In addition to building up your financial resilience, check off another key box by monitoring your credit. Experian's free credit monitoring service helps you keep track of your score and understand how it impacts your borrowing ability. In addition, you'll receive alerts to changes in your report and score, which can help you detect any suspicious activity early on. Early detection is important for mitigating the financial fallout if you become the target of credit fraud.