How to start building an emergency fund
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Key takeaways
- An emergency fund is a savings account for urgent, unexpected events
- Ideally, an emergency fund has enough money to cover at least three months living expenses
- Start building your emergency fund by contributing a set amount every month
Saving for emergencies is an important part of good financial health. But setting aside an emergency fund amount that equals several months of living expenses can be intimidating, especially when your budget is tight. This guide can help you build a cash reserve—and gain greater financial security and peace of mind.
How much should I have in my emergency fund?
The typical approach is to think in terms of monthly living expenses and aim for a fund that covers at least three months. If you’re supporting a family, shoot for nine months. The goal is to have money to fall back on for a while if you lose a source of regular income or face a large, urgent cash need.
Another approach is to think about unplanned expenses you’ve had in the past—car repairs, for example—and use those amounts as an initial goal.
Either way, don’t let the dollar figures paralyze you. Any emergency savings is better than none. What’s important is that you’re saving, reducing the chance that you’ll have to take on debt in an emergency.
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How do I start an emergency fund?
The first step is to include building an emergency fund into your budget. Instead of focusing on the total amount you want in your emergency fund, break it down into smaller chunks that you can reasonably achieve each month. You’ll be surprised how fast your fund will grow.
Then take a look at your spending to free up money to increase your emergency fund contributions. Everyday savings can add up. Identifying a specific expense to reduce is more effective than making a general resolution to “save money.” You can change your overall behavior—if you start small and be specific.
Other ways to build your emergency fund include:
Where should I keep my emergency fund?
The ideal emergency fund account keeps funds available when you need them—not tied up in investments, for example—but sequestered enough that you won’t be tempted to tap it for everyday expenses. Consider creating a separate, interest-bearing, FDIC-insured savings or money market account at a different financial institution than that of your checking account. A high-yield savings account can be another good option for an emergency fund.
Should I pay down debt or build an emergency fund?
If you’re struggling with high-interest debt on your credit cards, saving might be the last thing on your mind. But without an emergency fund, you might end up adding to that debt should an unexpected expense, such as car repairs, arise. Try to allocate money to both debt and savings each month, even if your savings contributions are small.
Emergency fund FAQ
All three funds are savings accounts, but they have different purposes. An emergency fund is for relatively big, unexpected expenses, such as those that follow a job loss, natural disaster or car accident. Ideally, the fund should cover living expenses for a minimum of three months. A rainy-day fund is for smaller unexpected or irregular expenses that aren’t in your budget, such as new tires or appliance repairs. Sinking funds are for specific planned purposes, such as a wedding, vacation or home renovations.
